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Seed Innovations Ltd

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Time to plant a SEED?

 

“…Times have been tough lately for CBD investors, but the sector remains a shining prospect. Perhaps, at these prices, CBD stocks are beginning to look like value shares? If so, with its carefully curated portfolio SEED is well worth a look…”

 

Early last year cannabis shares soared as new market rules allowed producers to list on the LSE, and the return of the Democrats to the White House raised the prospect of liberalisation in the vast North American market. But though business continues to boom for producers and retailers share prices have fallen as regulatory change has stalled and investors have offloaded growth stocks during this year’s shift towards value. Small cap investment fund Seed Innovations (AIM:SEED) – formerly known as FastForward Innovations – is one of those to have taken a knock, but seems well positioned to take advantage of a renewal of interest in what remains a highly prospective industry.

SEED seeks to give exposure to disruptive growth opportunities in the life sciences and technology sectors that would otherwise be inaccessible to private investors. The fund has positions in a range of industries but has a conviction stake in the future of the medical cannabis sector, with significant holdings in cannabinoid (CBD) and hemp-derived ventures in Europe, North America and Australia.

SEED’s holdings in the cannabis market and beyond

 

Last year the fund took an 8.85pc stake in the Eurox Group, offering access to Germany’s flourishing cannabis market, the largest in Europe. Eurox started selling its own branded products last August, and is positioned to take advantage of radical proposals by Germany’s new left-leaning coalition government to legalise cannabis. The plan, which would make the country one of only three to permit the commercial sale of recreational cannabis – the others are Canada and Uruguay – could open a market worth €4.7bn a year. Eurox, which also has operations in Portugal and the UK, raised €4.4m this spring to fund its expansion plans, increasing the value of SEED’s holding from €3m to €5m.

SEED has a 3.1pc stake in Little Green Pharma, another medical-grade cannabis producer with designs on the German market. Last month Little Green entered into an agreement with Four 20 Pharma for the supply of a new tetrahydrocannabinol (THC) strain to Germany (THC produces the high people associate with using marijuana recreationally), the company’s largest single-strain offtake quantity contract to date, with a minimum take or pay commitment of $7.5m. Based in Australia, Little Green also sells its branded range of medical cannabis products to its domestic market, and it is making inroads into the British, New Zealand and Danish markets, where it recently acquired a cultivation and manufacturing facility capable of producing more than 20 tonnes of biomass a year. Last month the company reported revenues of $3.2m, up by a third on the previous quarter.

SEED has a 4.4pc holding in Yooma Wellness, a Canada-based marketer and distributor of CBD and hemp-derived wellness products currently pursuing an aggressive buy-and-build strategy. Yooma has acquired companies in the CBD and wellness space worth some $57m, including the EMMAC Life Sciences Group, which offers brands such as Blossom, a CBD skincare producer, MYO, nutraceutical brand focused on sports nutrition, and hemp-protein snack specialists What the Hemp and Hello Joya. Yooma also owns Socati Corp, a processor of THC-free broad-spectrum hemp extracts and ingredients for use in CBD products, and Vitality CBD Ltd, a leading UK distributer of CBD products, including oils and sprays, and range of CBD skin care cosmetic products.

SEED has a cluster of smaller cannabis-based holdings, including CiiTECH Limited, an established research-led cannabis healthcare company focused on cannabis research and the commercialisation of cannabis products, Northern Leaf Limited, a Jersey based medical cannabis cultivator (and the first company to be awarded a UK licence to grow medicinal cannabis in 22 years), and South West Brands, a London-based group seeking to establish itself as a multi-brand consumer goods group developed specifically for the CBD industry. South West recently launched two consumer brands, LoveMeMeMe and FEWE.

SEED also has interests in the wider health sector, including NASDAQ quoted Portage Biotech, which develops treatments for various cancers, eye disease and acute kidney injuries, and Juvenescence, a biopharmaceutical company developing therapies to modify ageing and increase healthy human longevity, with interests including the development of nutraceuticals and medicines to combat ageing-related diseases related to the musculoskeletal system. Juvenescence produces drinks and powders under the Metabolic Switch brand.

Beyond health SEED has 43.75pc stake worth £4.7m in Leap Gaming, an Israel based B2B developer of virtual-sports, slots, and casino applications serving gaming brands. Looking ahead to a possible stock market listing later this year, Leap has a presence in several European countries, and last month secured a content supply license giving it access to the lucrative UK gaming market, estimated to be worth some £1.4bn.

The slow liberalisation of the cannabis sector

 

But though SEED’s fund is hedged somewhat with interests beyond the CBD sector, the company is committed to the continued growth and opening up of the cannabis industry. The longer term prospects remain highly promising. The global market for CBD, medicinal and recreational cannabis was worth $37bn last year, according to market intelligence firm Prohibition Partners. The huge US market grew from $100bn in 2014 to $20bn in 2020. Global cannabis sales are expected to surge 41pc year-on-year in 2021, totalling $31bn, according to a recent report by market research firm BDSA, which also predicts global cannabis sales will surpass $62bn within the next five years. The European market is forecast to top €3bn this year.

Progress is slow, but the shifting of the tide of attitudes towards cannabis among the public and policy makers is facilitating the gradual liberalisation of the market. The UK legalised medicinal cannabis in 2018, allowing doctors to prescribe it for medical use, and the Financial Conduct Authority gave the green light for licensed UK-based CBD companies to list on markets last autumn. The ruling led to a surge in companies applying to go public, and, of course, in investor interest: retail investors poured more than £300m into cannabis stocks earlier this year after several high profile IPOs. But the market is still in the process of opening up. It remains illegal to grow cannabis in the UK: even British-based CBD companies must import the extract. And health specialists were only recently authorised to prescribe CBD for medicinal purposes: NHS general practitioners still cannot prescribe medicinal cannabis as an everyday treatment. The result is a sprawling, splintered market, in which customers self-administer their own treatment by trying an array of over-the-counter commercial products.

The wider European CBD market is also gradually opening up – more than a dozen countries allow or are currently discussing liberalisation – but is still fractured, with regulations and attitudes differing sharply from country to country. Some allow the use of medicinal products containing cannabinoids, and others the medical use of unauthorised products or preparations. Some allow the manufacture of cannabis, others its import, and some both.

The huge North American market continues to grow: recreational use is now legal in Canada and in 18 US states. But high hopes that the liberal Biden administration would be able to push through federal legalisation of marijuana in the US, allowing banks to give legal cannabis companies support without risking penalties,have so far been disappointed: legislation introduced by Democrat Senators has failed to gain sufficient support on a still conservative Capitol Hill. US-listed cannabis stocks, which soared when Biden came to power, are down by more than a third since the start of 2021. Analysts believe liberalisation is necessary to spark interest in cannabis stocks among institutional investors, the big funds with the financial firepower to commit long-term patient capital to the sector. 

So, though the cannabis market continues to grow, it seems the sector’s share prices are stalled until states are able to pass legislation setting the industry on a surer regulatory footing. CBD stocks have also suffered from this year’s market ‘correction’ from growth stocks towards value. But there is the prospect of more immediate, albeit gradual, progress in Europe. Germany’s plans to legalise marijuana, if successful, could spark a domino effect across the continent. And UK authorities are taking tentative steps towards clarifying Britain’s complex regulatory environment. Following a 2019 study by the Centre for Medical Cannabis which found that CBD products sold in the UK were of ‘a wide range in quality’, with some containing less of the cannabinoid than claimed, or none at all, the Food Standards Agency (FSA) is enforcing stricter regulations for CBD edibles. This spring the FSA published a list of 3,500 ingestible products with CBD that are in the process of gaining approval for sale: any products not on the list should be immediately withdrawn by English and Welsh retailers. Potentially thousands of products and brands linked to unsuccessful applications are due to be removed from sale, including high profile brands like Cellular Goods, in which David Beckham holds a stake. It’s tough love, but the clampdown has been welcomed by several more established CBD producers. Speaking to the Financial Times Love Hemp CEO Tony Calamita said the list was an ‘incredibly positive step for the industry’, protecting consumers from ‘cowboy products’. Curaleaf International boss Antonio Costanzo said the FSA initiative was ‘the starting point to get some clarity on how we can bring new products to the market’.

Outlook

 

SEED’s immediate prospects, then, would seem to be depend on market sentiment and legislative issues beyond its control. After touching 10p at the height of the cannabis stocks boom early last year the company’s share price has since settled around the 5p to 7p mark. According to SEED’s most recent interim results, the fund’s NAV per share at 30 September 2021 was 10.98p, giving it a total value of £23.35m.

The company remains committed to its strategy, stating in its interims that while ‘publicly listed cannabis stocks across the globe have seen some price pressure over recent months negatively impacting our net asset value, we continue to be a firm believer in investing in the medical cannabis, health and wellness space.’ The fund points to the sale of its stake in EMMAC Life Sciences last year, which realised a gain of £1.9m, a 1.86 times return on the original investment, as evidence of its ability to spot winners in the space. Times have been tough lately for CBD investors, but the sector remains a shining prospect. Perhaps, at these prices, CBD stocks are beginning to look like value shares? If so, with its carefully curated portfolio SEED is well worth a look.



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