Research Capital initiated coverage of Aleafia Health (TSX:AH) with a “buy” rating and price target of 75 cents (Canadian). The stock closed at 36 cents on Sept. 21.
“We believe that Aleafia’s revenue growth will be mainly driven by its adult-use cannabis segment, which has a large addressable market for licensed producers in Canada,” writes analyst Venkata Velagapudi.
“We estimate the addressable market for licensed producers to reach an estimated $5.1-billion by 2025. Based on our estimates, Aleafia will increase its market share in adult-use cannabis segment to around 2% from the current level of 0.6%,” he added.
Mr. Velagapudi said his view is driven mainly by four factors:
- Aleafia has recently launched value brands in its dried flower category, which play a critical role in gaining market share based on observations in the Canadian cannabis market.
- Aleafia has the ability to manufacture cannabis derivatives, which may offer a strong value proposition to its consumers, given its low-cost structure, leading to a growth in sales from cannabis derivatives.
- As Aleafia expands its distribution network across Canada gradually over the long-term, “we expect the market share to improve further.”
- And as Aleafia focuses more on in-house brands rather than providing cultivation and extraction services to other licensed producers, “we expect the company to allocate a higher quantity of raw material to adult-use cannabis segment.” As the net selling price per gram is significantly higher for adult-use segment relative to the wholesale segment, “this will lead to a higher revenue generation, in our view,” Mr. Velagapudi said.