INCR - InterCure: Why The Company Is Grossly Undervalued By Wall Street

Summary

• InterCure earned CAD$39 million in Q3 2022, up 61.2% from the previous year.
• Moreover, at the end of Q4 2022, the total number of licensed patients using cannabis for medical purposes in Israel was 123,212, up 13,860 from the previous year.
• Currently, the cannabis industry continues to grow rapidly, but due to continued regulatory uncertainty in the United States, cannabis ETFs remain off the radar of investors.
• InterCure is one of the few cannabis companies with positive cash flow, strong revenue growth, and a product portfolio that makes InterCure a great candidate for long-term investors.
• The company's EBITDA was $5.3 million in Q3 2022, up 178% from Q3 2021.

InterCure ( INCR ) is one of the world's leading manufacturers and distributors of pharmaceutical cannabis and cannabis-based products for medical use in the European Union, Israel, and Canada.

InterCure has a vertically integrated business model that controls the entire value chain, from new product development to distribution to the end consumer. As a result, this allows the company to expand into new markets with higher efficiency and benefit from lower operating costs. In addition, over the past three years, the company has been actively partnering with other cannabis industry leaders such as Tilray (NASDAQ: TLRY ), Charlotte's Web ( OTCQX:CWBHF ), and Organigram (NASDAQ: OGI ) (TSX: OGI:CA ).

Canndoc, a subsidiary of InterCure, remains the largest licensed cannabis producer in Israel, with the highest prevalence of cannabis use in the world. According to Statista , about 27% of the adult population in this country used cannabis in 2020. Given the relatively high birth rate and the support of the Israeli government for this industry, these factors make InterCure an attractive asset for long-term investors.

Company's Financial Position

Under the leadership of Alexander Rabinovich, InterCure earned CAD$39 million in Q3 2022, up 61.2% from the previous year.

The company achieved such impressive results despite a slowdown in the admission of new patients in Israel in the first two quarters of 2022 due to the suspension by the Ministry of Health of the licenses of doctors responsible for issuing about 20,000 prescriptions for medical cannabis. However, revenue growth was driven by the expansion of InterCure's branded product portfolio and the continued trend of increasing cannabis license holders in Israel in recent years.

Moreover, at the end of Q4 2022, the total number of licensed patients using cannabis for medical purposes in Israel was 123,212, up 13,860 from the previous year.

Comparing revenue growth rates with other companies involved in the production of cannabinoids, in contrast to InterCure, this financial indicator of Canopy Growth Corporation (NASDAQ: CGC ), Tilray, and Aurora Cannabis (NASDAQ: ACB ) is declining year-on-year and quarterly.

On a Q2 2022 earnings call , the company's CEO said that due to the changes to the 109 Protocol, there were significant barriers to importing products of InterCure's partners into Israel. However, as a major player in this market, InterCure was the first company to comply with the new import regulations, thus allowing it to resume importing medical cannabis into the country. And already on November 17, 2022 , InterCure announced a new partnership agreement with Organigram, according to which it will supply the Israeli company with up to 20,000 kg of dried flower over a three-year period, while about 2,800 kg have already been delivered since July 2022. While one of its main competitors, Tilray, said it would not repeat deliveries to Israel due to "severe deterioration of market conditions" . As a result, I believe that the current situation in the Israeli medical cannabis market will have a positive impact on maintaining the pace of InterCure's business expansion in this country.

Despite effective business management and expansion of the company's products, the price/sales ratio continues to decline, indicating that the potential for growth in the price of InterCure shares remains. So, for example, this ratio was 2.45 in 2021. Considering the company's current capitalization, it will decrease to 1.71 in 2023, which is lower than the sector average by more than 60%. The main reason for the decline in the P/S ratio is that the cannabis industry is under pressure due to the lack of regulation in the country with the largest economy in the world. While the odds are slim, things could change soon as a group of lawmakers in the U.S. House of Representatives is pushing a new cannabis bill in 2023 to amend federal law, including allowing the possession of firearms to medical marijuana users.

At the same time, InterCure 's P/S ratio remains one of the lowest among the key players in the cannabis industry, which only reinforces the belief that Wall Street undervalues the company.

The company's EBITDA was $5.3 million in Q3 2022, up 178% from Q3 2021. This indicator continues to improve from year to year, mainly due to an increase in the number of patients in Israel who are licensed to consume medical cannabis. InterCure's EBITDA margin was 18.8% in Q3, one of the highest among the top 10 cannabis companies.

The slight decrease in the company's EBITDA margin compared to the previous quarter may be due to the continued expansion of the network of pharmacies focused on the commercialization of medical cannabis in Israel, which leads to an increase in expenses. At the end of the 3rd quarter of 2022 , it included 25 pharmacies throughout Israel under such well-known brands as Cookies, Max Pharm, and Lemonade, seven more pharmacies than the previous year.

At the same time, InterCure's EBITDA margin is significantly higher than that of its main competitors. In my opinion, this is due to the company's flexible business model, which allows it to substantially benefit from its status as the leader of the Israeli cannabis industry.

Moreover, according to my model, the company's margins will begin to improve at a faster pace starting in Q3 2023 due to the weakening of the US dollar against the euro and the pound sterling and lower inflation in InterCure's key markets.

Unlike many large cannabis producers, InterCure has little to no debt problems, especially during the current interest rate hikes by the Fed and European central banks. Net debt has remained negative in recent years due to the high level of cash on the company's balance sheet. At the same time, total debt was $56.3 million in Q3 2022, up $10.2 million from the previous quarter. But even with the increase in debt, the company's total debt/EBITDA ratio continues to decline year on year and has stood at 2.7x over the past 12 months, thus indicating, in my estimation, that there are no significant risks associated with InterCure's debt servicing.

The organizational structure of InterCure

On January 26, 2021 , InterCure announced a merger agreement with SPAC called Subversive Real Estate Acquisition REIT LP. At the end of 2021, the company held the following stakes in principal operating subsidiaries.

Moreover, InterCure maintains the momentum of business expansion, and the following companies have been acquired since the beginning of 2022, thus allowing it to strengthen its leading position in Israel and begin a more aggressive expansion into the European cannabis market.

InterCure clinical trials and development

The main factors determining the likelihood of maintaining strong revenue growth and competitiveness in the long term are developing new technologies, researching promising agricultural methods, and expanding the product portfolio. InterCure has partnered with world-renowned institutions to enable the company to optimize and establish additional cannabinoid profiles.

The company, together with partners, is conducting ten clinical trials to determine the effectiveness of product candidates for treating the symptoms of various neurodegenerative disorders and reducing the pain of patients with cancer and other diseases. However, InterCure is the only supplier of cannabis required for the production of products participating in these clinical trials.

The company is currently completing a phase 3 clinical trial evaluating the effectiveness of cannabis oil with a 20:1 ratio of CBD: THC in treating children with an autism spectrum disorder. According to clinicaltrials.gov , the estimated completion date for the study is the end of 2022, and as a result, I expect the company to publish its results in the 2nd quarter of 2023. If the primary and secondary endpoints are reached, this will increase interest in the company from large institutional investors and show that the development vector of the InterCure R&D center is correct, which may attract interest from pharmaceutical companies.

Conclusion

Thanks to the innovative approaches of the former Israeli Prime Minister Ehud Barak, who has been the chairman of the board of directors of the company since 2019, and Alexander Rabinovich in the conduct of business, InterCure is one of the world leaders in the production and distribution of pharmaceutical cannabis and products based on it for medical use in the territory Israel and Canada.

In 2022, the company partnered with Cookies to expand its business into Europe by opening its first store in Austria. In the short term, InterCure 's management plans to open pharmacies with medical cannabis in the UK, gradually increasing their number and the countries where the company will be present. At the same time, InterCure continues to focus on Israel, a world leader in the percentage of adults who use cannabis. To this end, the company continues to expand its network of pharmacies and expects to obtain permits for the sale of cannabis in 6 more pharmacies.

Currently, the cannabis industry continues to grow rapidly, but due to continued regulatory uncertainty in the United States, cannabis ETFs remain off the radar of investors. However, from year to year, more states are beginning to legalize both the medical and recreational use of cannabis. Thus I believe that in the next three years, cannabis will be legalized at the federal level, which will cause a significant increase in investment interest in this industry.

The company is conducting about ten clinical trials to determine the effectiveness of InterCure products in relieving symptoms of nervous system diseases and reducing pain in patients with cancer and autoimmune diseases. In my opinion, if the primary and secondary endpoints are reached, this will contribute to a significant increase in investment interest from investors and revenue growth in the long term.

InterCure is one of the few cannabis companies with positive cash flow, strong revenue growth, and a product portfolio that makes InterCure a great candidate for long-term investors. In addition, I believe that the improvement in the global macroeconomic situation, including the continued weakening of the US dollar and lower inflation, will improve the company's margins and thereby not only increase the pace of business expansion into new markets but also outperform the S&P 500 ( SPY ) in 2023.

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