I have been keeping an eye on GTEC Holdings stock $GGTTF for a while now. GTEC has built up its capacity and is generating consistently increasing revenues. The latest financial earnings reported growth in revenues, however, there was a required holding back of product to fulfill Israeli product needs. There has been a consistent increase in the overall price of cannabis received to $7.48 per gram. Given GTEC’s capacity, they could be printing about $85M – $90M (CAD) in revenue annually. So, what should $GGTTF be worth if they were to consistently increase their revenues over the next few quarters to get to 100% capacity?
I am going to break down the possibility of this year’s stock price given the current financial statements and then show what is possible for the coming few years.
Here is a look at $GGTTF stock at this time:
Let’s take a look at total capacity first. Also, something to keep in mind is that the $7.48 aforementioned per-gram price, given via the latest earnings release, is in Canadian, so I will adjust this as I go.
Here are the facilities that GTEC Holdings is operating & building along with the respective capacity:
- Alberta – 1,200 KG
- Grey Bruce – 1,640 KG
- Chase – 1,000 KG
- Labs (Testing) – 1,250 KG
- Kelowna (Under Construction) – 2,150 KG
- JV w/3PL (Awaiting License & Expected cultivation in July) – 6,000 KG
This gives an approximate 12,000 KG annual production rate. At $7.41 per gram average-weighted price, that is approximately $88M CAD in annual revenue ~$72.5M USD.
NOTE: all of the below charts are in USD.
The Joint Venture between 3PL is going to be huge from a capacity perspective; it will double capacity. GTEC should start to see product being cultivate very soon. Because of the size of the facility, I am thinking that from an operational standpoint the cost metrics may be improved. But, that is not linear and I don’t want to suggest that a larger facility will necessarily mean higher margins either. It may be that a boutique approach yields a higher gross margin but needs more attention in the growing and cultivating phase. I am interested in seeing the numbers when they start showing up.
Revenue was slightly muted for the latest quarter due to a fulfillment obligation to Isreal:
Now that the order was fulfilled, there should be continued orders from Isreal as well as an increase of orders that were hampered by the fulfillment. Nonetheless, I would still want to see improved revenue growth. This is cannabis’ moment. Players should be printing large increases in revenues right now to solidify themselves in the marketplace.
Gross margins are a bright spot. However, my numbers and the company numbers differ in the way they are measured. The numbers shown here are consistent with the manner in which I compare all of the cannabis companies:
According to the press release, gross revenues were $2.229M and net revenues were $1.970M implying a $259k cost of goods. That pushes the gross margins up as it does in my chart. Yet, GTEC claims to have a 41% gross margin (And that their margins increased). The reason there is a difference is the way a company would look at internal numbers versus my usage of public numbers. Nonetheless, I keep things consistent to ensure that, well, things are consistent.
Regardless, these are hall-of-fame margins (when compared to other companies using the same measuring manner). I would expect that the eventuality is that GTEC sees normalized gross margins. We will see.
The end goal is to get to the bottom line.
Operating costs have been kept at bay as the company has built up capacity:
I specifically wanted to show the actual costs versus the efficiencies first so that someone looking at this could see how consistent operating costs are.
If GTEC continues this vigilance then metrics will improve significantly. However, I am not certain about the cost associated with the joint venture with 3PL and how operating costs will be factored in; we will know that more in the upcoming quarters.
Still, if total operating costs can remain at these relatively low levels, as revenues increase there will be continued increases in the efficiencies:
Operating efficiencies are a mathematical equation based upon total operating costs over total revenue. As revenues increase, this chart will continually trend lower. The chart tells how efficient a company is at producing products versus its operational basis.
Most of the best companies are printing about 30% – 35% total operating costs versus revenues. GTEC is high but, that is a factor of them having a certain amount of production possibility but not yet gaining the revenue to support this just yet. GTEC will continue to grow into its facilities. So, as revenues increase and production continues to ramp up this chart will show improved metrics.
What is important to note is that moving down the financial statements you are looking for continued cost savings so that the eventuality is EBITDA profitability and net earnings profitability. At such higher levels, it would be difficult to achieve EBITDA profitability let alone net profitability. And yet, despite the elevated numbers, GTEC is positive in both.
GTEC has yet to achieve consistent numbers with certain metrics that would create a profitable environment. And yet, they have achieved EBTIDA profitability over the past several quarters:
When I see the elevated costs for operating costs and then look down to the bottom line, it’s impressive that they are able to accomplish the numbers they have done. Imagine what happens when revenues increase while operating costs grow at a much slower rate? EBITDA will continuously increase.
GTEC net income was positive in the last financial release, and kudos to them for that (Not all cannabis companies can brag about that and especially with elevated operational costs):
Again, it is GTEC’s ability to grow into their facilities as revenues increase that I will be focusing on. As they expand their sales and usage of the respective facilities they are going to print ever-impressive metrics with operational efficiencies. That trickles down to EBTIDA and then net earnings.
Moving on to another important metric is the Book Value per share. From a value perspective, this is important because it shows what a company could be worth if there was a fire-sale of all operations. For some, this is a trading strategy; looking for companies that are undervalued on a per-share basis. The idea is simple: if a stock is below its book value it should theoretically move higher.
For value investors, this may also add a sense of “safety” from the perspective that there is a bottom to the market. The price of the stock should theoretically keep above book value.
As it is, $GGTTF is trading above its book value. Although the most recent financial data was just released, there was a subsequent capital bought-deal that closed bringing in about $17.5M USD.
Also, GTEC paid off a significant debt obligation; they are effectively debt-free. They have cash and are debt-free.
So, with a growing footprint, EBITDA profitability, and net earnings positive, what should $GGTTF be trading at?
GTEC Holdings Base-Case scenario
This is the time for cannabis companies. As the world comes out of prohibition, cannabis companies should be printing higher and higher revenues. GTEC has seen muted revenues but, this is largely owed to the fact that they had to withhold product so that they could fulfill their Israeli obligation. I suspect that there will be continued sales to Israel and at the same time, a boost in revenues as products are available to consumers in Canada that missed out over the past quarter. Read: I expect further revenue gains.
Margins are very high comparatively. But, there needs to be continued growth in revenue to come in line with operating costs. Still, GTEC is profitable putting them ahead of the pack.
Given the entire footprint of capacity that GTEC would have, some 12K KG of annual product, and at the $7.41 per gram rate (Edging higher and higher), this would be about $72.5M in total revenue annually. If we were to break down this metric and apply basic value investing to the stock, using 65% gross margins, 35% operating efficiencies, 10% continuing costs, and finally 205M shares outstanding, this puts them with about $14M in net earnings or, about $0.10 per share. Given 50x future earnings, that is a $5.00 stock all day.
But, it will take them a while to grow into the entire facility at 3PL. So, I would not rush to think this stock will be there any time soon. Maybe about 2.5 years to 5 years. During that time I would expect further growth opportunities as GTEC expands.
For now, given just the $0.0115 per share potential earnings for the year (Assuming they continue being profitable at that pace), $GGTTF trades at $1.15 per share within a few month’s time. Then, the longer-term outlook is improving.
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