How to Capitalize on Germany’s Move to Legalize Cannabis
November 30th, 2021
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Germany’s incoming governing parties recently announced a formal agreement to legalize adult-use cannabis when they take power. While personal possession has already been decriminalized, the new proposal seeks to establish a regulated market for adult-use cannabis. The move could create an industry like those in Canada and some U.S. states.
While the legislation won’t be finalized for at least a year, cannabis imports are likely to play a critical role in the local market given the lack of domestic cultivation. As a result, there’s a significant opportunity for companies that export products to the newly legal market, including both domestic and international cultivators and manufacturers.
Let’s look at how Flora Growth Corp. (NASDAQ: FLGC) is positioning itself to capitalize on Germany’s upcoming recreational cannabis market and why investors should take a closer look at the stock over the coming quarters.
Flora Growth previously announced a €2 million investment and strategic partnership with Hoshi International Inc., a medical cannabis business with a growing European presence. With operations being built out to span cultivation, manufacturing, and distribution, the company is uniquely positioned to become a leading European cannabis supplier.
Through the partnership, Flora intends to cultivate product in Colombia and send it to Malta, where Hoshi could process it into E.U. GMP product that’s free to move into Germany and other European markets. With its premium and low-cost cultivation, Flora could offer a significant competitive advantage over other global cannabis suppliers.
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Luxembourg, Italy, France, Switzerland, and Malta have all introduced measures to decriminalize or legalize some form of cannabis within their borders. For example, Switzerland began a pilot program for adult-use cannabis and France began a medical cannabis test program in a bid to become the 23rd European country that permits medical cannabis use.
Flora Growth leverages natural, cost-effective cultivation practices to supply cannabis derivatives to its diverse business divisions, spanning cosmetics, hemp textiles, and food and beverage. In addition, the company operates one of the largest outdoor cultivation facilities in the world, Cosechemos, enabling it to cultivate and process premium product at below market prices.
The company has demonstrated that it can achieve a production cost of less than six cents per gram of dried flower. These prices yield attractive profit margins and below-market prices, making it easy to dominate new markets—particularly in high cost regions of the world.
For example, if the company were to sell at $1.00 per gram, it would realize an 80% profit margin while putting most Canadian producers into the red. The company is also already harvesting non-psychoactive CBD cultivars with yields that are 40% to 60% higher than management originally anticipated with high-THC cultivars coming this month.
Bullish Analyst Outlook
The German market offers a compelling opportunity for future growth, but Flora Growth is already generating revenue in the interim. The company’s branded beauty products account for the lion’s share of sales, but dried CBD flower provides further upside potential, setting the stage for an annual run rate of more than $40 million by some estimates.
The company reported revenue of $2 million with a 60% gross margin during the first half of 2021, but management expects revenue of $9 million to $11 million, exclusively of M&A and dried flower shipments, during the second half of the year.
MKM Partners believes that net sales could reach nearly $70 million in 2023 with adjusted EBITDA of $25 million and strong double-digit growth through 2028. As a result, the analyst issued a Buy rating and a $11.50 per share price target, reflecting a significant premium over the current market price of just $2.11 per share.
Germany’s move to legalize and regulate recreational cannabis could be the first domino to fall and lead to a wave of legalizations across the European market. Flora Growth Corp. (NASDAQ: FLGC) is well-positioned to benefit from the move through its partnership with Hoshi International Inc., a leading cultivator, manufacturer, and distributor in the European market.
In the meantime, the company is already generating substantial revenue through the sale of beauty, hemp textiles, and food and beverage products, and soon bulk CBD flower. These products generated $2 million in sales during the first half of the year and could accelerate to upwards of $10 million over the second half of the year.
Investors may want to keep an eye on the stock over the coming quarters given these catalysts.
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