In the framework of Herodium’s request to the court to convene a meeting to approve the merger, a valuation was added to the merged company Panaxia Israel. In the first nine months of 2018, Panaxia recorded a loss of NIS 4.98 million. Revenues in the first nine months of 2018 amounted to only NIS 2 million.
The first swallow for a real valuation of Cannabis on the Tel Aviv Stock Exchange. Herodium sack (775.5 -4.85%) (TASE: PHNX) today announced that it has submitted a final request to the court to convene a general meeting of shareholders to approve the merger between the companies.
In the framework of the request, a valuation was published for Panaxia’s activity, which was conducted by Sagi Ben-Chelouche, CEO and owner of IFS Consulting, which determines that the company’s value at the end of January this year is NIS 753 million, At a weighted average of 70% (with a deviation of 5%).
The share price at the closing today embodies a company value of NIS 108 million, apparently below the valuation value. However, these NIS 108 million constitute only the share of the shareholders of Herodium. With the merger, Panaxia shareholders will receive 75% of the company, so that the value will close at NIS 432 million, still below the valuation. However, with the start of exports (based on the valuation), the share of Panaxia’s original shareholders in the company will rise to 90%, meaning that at present the company’s value will be NIS 1 billion, more than 20% above the optimistic valuation.
The valuation was prepared using the cash flow capitalization method (DCF). The cash flows were capitalized at the weighted capital price, which corresponds to the risk level of the activity and is estimated at 18.2%. The value obtained is the economic value of the activity, which is not dependent on the composition of its capital, that is, it is independent of the way of financing the company, either through equity or through foreign capital.
“Since the price of medical cannabis worldwide is estimated at about $ 10 per gram, the value of this potential production at world prices is about NIS 600 million a year,” the valuation says.
The Company’s forecast of future income for the coming years was added to the valuation. According to the forecast, revenues for the first year will total NIS 31.5 million, NIS 109 million in the second year, NIS 3.3 million in revenues for the third year, and NIS 448 million in revenue over the next six years. The profit is expected to reach NIS 143.5 million in the sixth year.
The operating profit after six years of activity, according to which the estimate attached to the request filed by the companies to the court is expected to amount to NIS 188 million, and gross profit of NIS 213 million.
In the first year, all revenues will come from activity in the local market only, with exports starting only in 2020 – 9 months after the approval of the export of cannabis products from Israel. In the second year, the company expects revenues from the export of all its Cannabis products to reach NIS 21.2 million; A year later, revenues from exports are expected to total NIS 37 million; And revenues of NIS 339.1 million in the sixth year of activity and fifth in exports.
The company’s salary expenses will amount to NIS 6.1 million in the sixth year. Free cash flow at the time of valuation was NIS 578 million. In addition, additional financial data were published in the past year compared to 2017, but since the company began operations in May of 2017, the data are not comparable. In the first nine months of 2018, Panaxia concluded with revenues of NIS 2 million. In the corresponding period in 2017 the company recorded revenues of 79 thousand shekels.
The statement shows that Panaxia, which owns a factory approved for the production of cannabis, manufactures for 9 of the 10 companies active in the market and sells about 50,000 products per month in the Israeli market only. However, the company’s revenue breakdown explains why the company delayed its business exposure: In the first nine months of 2018, the company recorded revenues of only NIS 2 million. It lost NIS 4.9 million.
The reason for the gap between the number of products and the high business relationships and the low revenues compared to other old cannabis companies is the profit margins on the sale of products: part of the income goes to the product growers, and some goes to the distributor and the retailer, as well as to the point of sale when it comes to products sold in pharmacies.
However it should be noted that even since the end of September 2018, the scope of activities of Panaxia has increased significantly and has increased the number of growers who work with it. In addition, as of the end of March, only cannabis products manufactured in a GMP-approved plant will be marketed in Israel. Pankasia is one of the two currently approved factories that offer production services to other growers (the second is the Basalt plant, a private company that has only recently received GMP approval), and BOL’s third plant, but it produces only for BOL itself.
In addition, Panaxia is intended for export, and products exported from its own factory, whether products in its independent exhibits or those of other companies, are suitable for Israeli export standards. The government of Israel has taken the decision to approve exports but in practice it is supposed to begin only towards the end of the year. It will be possible to export only to countries that approve this, and only if the products meet the import standards of those countries. If Panaxia moves through all of these hurdles as planned, exports are expected to significantly increase its revenues.
Since the company was founded, the company has been financing its investment activity, so far it has received NIS 7 million from the controlling shareholder. Investors in the market accepted the valuation with relative disappointment, with the Herodium share moving from a 20% advance to an increase of only 2%, and ending the trading with a 5% drop.