Today, Canada’s cannabis companies are the only ones trading on US exchanges, but their businesses are grappling with rampant oversupply. While U.S. cannabis companies do much better financially than their Canadian counterparts, their business is still illegal at the federal level, adding all kinds of tax and cost burdens.
Perhaps a better place to invest in cannabis is another country overall. Additionally, this country has the world’s highest cannabis use rate as a percentage of the population: Israel.
The growing Israeli market could get more attention soon as Canada-listed SPAC Subversive real estate acquisition (OTC: SBVR.F) recently announced plans to acquire the Israeli cannabis company InterCure (OTC: IRCLF) is bringing Israel’s leading cannabis business to the Toronto Stock Exchange to also apply for Nasdaq listing.
Currently, the Israeli cannabis market is strictly medicinal, although it is believed the country will be fully legal on an adult recreational basis by 2022. In 2020, the medical market was $ 214 million, which is relatively small. But it’s estimated that there were $ 1.7 billion in illegal sales on top of that. Analysts therefore believe that the legal Israeli market could grow ten-fold to around $ 2 billion by 2027, as adult use is legalized and normalized.
InterCure owns 100% of Canndoc, a vertically integrated player that claims to be the most profitable cannabis company in Israel based on gross margin and adjusted EBITDA. Although sales were only $ 20.6 million in 2020, Canndoc expects profitable US producers to grow rapidly to $ 74.4 million in 2021 and $ 137.3 million in 2022 this regard.
The company sells its product to all 121 pharmacies in Israel and has import partnerships with some of Canada’s leading exporters, including Tilray (NASDAQ: TLRY), Aphria (NASDAQ: APHA), organization chart (NASDAQ: OGI), and Charlotte’s Web (OTC: CWBHF). At the beginning of this year, InterCure acquired a majority stake in the Givol pharmacy chain, thereby establishing a presence in the retail sector. InterCure also expects international exports to Europe to begin in the second half of the year.
Subversive raised $ 225 million from public investors, and the acquisition will also raise $ 65 million from private investment in public equity (PIPE). After the money, InterCure will have a market cap of $ 687 million but a healthy cash on hand of $ 286 million, which equates to an enterprise value of just $ 400 million. InterCure forecasts adjusted EBITDA of $ 51.5 million in 2022, which corresponds to a forward value-to-EBITDA multiple of 7.8. That’s a lot cheaper than most U.S. counterparts who tend to have EV / EBITDA multiples of 2022 in their lower to mid-teens.
And despite having a lower valuation than many US multistate operators, InterCure has the great advantage that it does not have the extraordinary tax burdens that US companies have to bear. Therefore, it should be possible to convert a reasonable portion of this EBITDA into real free cash flow. The company estimates free cash flow at $ 21.6 million in 2022 with EBITDA of $ 51.5 million, or around 40% conversion.
Still, Subversive’s shares aren’t too far above the original SPAC price of $ 10. Should InterCure be able to implement its forecasts and successfully sell to Europe, this SPAC could be very good business for investors.
Big names in the kibbutz
There are also some fairly famous Israelis associated with InterCure. Ehud Barak, former Prime Minister of Israel and General Commander of the Israel Defense Forces, is the chairman of the company.
Other executives come from leading Israeli agro-tech, communications and pharmaceutical companies. The SPAC sponsor Subversive Acquisition, which is led by Michael Auerbach, has already concluded another large cannabis SPAC this year. He acquired Jay-Z’s cannabis company Caliva and consolidated it with West Coast Ventures to consolidate the California market. Of the two, I actually like the value of this InterCure deal better.
Don’t let this cannabis SPAC slip past your radar
Canada’s cannabis market is oversupplied, and US cannabis companies are hit by onerous tax regulations, among other things. Could Israel be the ideal place for your cannabis investment funds? Subversive and InterCure are a strong argument.
This article represents the opinion of the author who may disagree with the “official” referral position of a Motley Fool Premium Consulting Service. We are colorful! Questioning an investment thesis – including one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.