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You reap what you sow: CropLogic draws Creso Pharma takeover comparisons

Published 14-JUN-2019 13:23 P.M.


4 minute read

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As reported in last week’s 420 Report, emerging ASX cannabis group Creso Pharma Ltd (ASX:CPH) has received a takeover offer from Canadian cannabis company, PharmaCielo Ltd (TSXV:PCLO), for a total equity value of $122 million.

Merger and acquisition activity in any market segment can often signal the start of industry consolidation, and mark the commencement of significant corporate activity. Trevor Hoey this week speculated that the Creso deal could lead to further cannabis industry consolidation.

In his article, Creso acquisition implies big upside for CropLogic, Trevor specifically highlighted global agricultural technology company, CropLogic (ASX:CLI), and it’s prospects in comparison to Creso Pharma:

“Comparing headline numbers, industry presence, revenue diversification, proprietary technology, supply chain management benefits and in particular earnings visibility one would be hard pressed to justify why the group wouldn’t fetch a far better price than Creso.”

That would certainly be well received by CropLogic shareholders, given the company is currently trading at 4.8 cents per share, for an $18 million market capitalisation, while PharmaCielo is willing to pay A$122 million for Creso.

CropLogic has been operating in the agricultural industry for many years, providing high-tech equipment and expertise to growers of a wide range of crops.

The company offers growers of irrigated crops digital agricultural technology expertise based upon scientific research and delivered with cutting edge technology — science, agronomy and technology interwoven into an expert system for decision support.

After launching in 2017, CropLogic is servicing a significant portion of horticultural growers in the Washington State region, where it has a market share as high as 30% in some crops. It has also seen significant growth Northern Oregon, and has expanded into the Idaho market.

The company is already generating revenues from its established businesses, which compare quite well to that of Creso.

As Trevor highlighted, “In ballpark terms, CropLogic’s revenues for the 12 months to March 31, 2019 were about four times that of Creso’s and while its bottom line reflected a loss, it was more than $12 million less than Creso’s”.

Additionally, we need to remember that CLI’s one-off ASX listing expenses placed a drag on its earnings for the year to March 31, 2019.

But the real opportunity going forward comes from CLI’s recognition of the opportunity in the cannabis space.

CropLogic, with its existing platform, has recently identified an opportunity to service the hemp industry and access the lucrative (cannabidiol) CBD market. It is progressing its business in this area and is now in the process of planting a 500 hectare Industrial Hemp Trial Farm in Oregon with a hemp crop due for harvest towards the end of the year.

The Hemp Trial Farm project is operated by CropLogic’s wholly owned subsidiary, LogicalCropping, and is designed to apply the group’s technology and agronomy expertise to improve production and CBD yield.

CLI expect the 500 acre farm to be able to produce in the order of 800,000 pounds of industrial hemp biomass every year, and to be generating substantial revenues from the sale of its hemp crop within the next six months, or at the latest, early 2020.

Trevor ran the numbers and determined:

“Based on annual industrial hemp production of 800,000 pounds, a mid-range hemp biomass market price of US$40.00 per pound, a mid-range cost of US$6.00 per pound and an AUD:USD exchange rate of US$0.70, the 500 acre farm should conservatively generate a pre-tax profit in the order of $40 million.

“This is an earnings profile that neither Creso nor most other ASX listed cannabis players can match.”

While there are certainly no guarantees when it comes to farming, this $40 million pre-tax profit estimate compares extremely well to CLI’s current enterprise value of $13 million, while pre-tax profit in FY2020 should be about three times the group’s EV.

This suggests that CLI could be identified as an attractive takeover target, possibly at an attractive premium, or at the very least, shareholders will be rewarded as the stock pops up on investors’ radars.

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S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

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