Is this SEED now ready to grow?
“…Several of the new starts SEED supports have, however, made robust operational progress this year. Down two-thirds over the course of the year, is SEED’s stock due for a revival?…”
As might be expected of a company with holdings in an array of cannabinoid (CBD) ventures and other avant-garde growth stocks, SEED Innovations (AIM:SEED) has had a tough year in a viscerally inhospitable market. Several of the new starts SEED supports have, however, made robust operational progress this year. Down two-thirds over the course of the year, is SEED’s stock due for a revival?
The company seeks to give retail stockpickers access to ‘growth opportunities that have significant potential and would normally be inaccessible to private investors.’ SEED’s fund has positions in a range of wellness industries but has a conviction stake in the future of the medical cannabis sector, with significant holdings in CBD and hemp-derived ventures in Europe, North America and Australia.
SEED’s CBD holdings
SEED’s most recent portfolio valuation update, published last month, gives a useful overview of the current status of the company’s holdings, which we’ll summarise here. To begin with its CBD related interests, 24.43pc of SEED’s portfolio, worth £4,359,000 – up from £4,281,000 in March – is dedicated to a 7.48pc stake in Avextra, formerly known as the Eurox Group, which has been selling branded products to Germany’s growing cannabis market – Europe’s largest – for just over a year. The company is positioning itself to take advantage of radical proposals by Germany’s new left-leaning coalition government to legalise cannabis, which would make the country one of only three – along with Canada and Uruguay – to permit the commercial sale of recreational cannabis, opening a market potentially worth €4.7bn a year. Avextra, which also has a presence in Portugal and the UK, has undertaken a series of ambitious fundraises in support of its plans, raising €11.8m this year, including €7.4m just last month.
SEED has another significant CBD holding worth £1,313,000, equivalent to 7.36pc of its portfolio, in Little Green Pharma, an Australian based medical-grade cannabis producer cultivating its own cannabis flower from facilities in Australia and Denmark. The company is evolving its strategy to target European as well as Antipodean markets, partnering with German cannabis pioneer Cannamedical for the supply of bulk medicinal cannabis from Denmark to Germany, with a potential value of more than €3m. It has signed a purchasing agreement with Sana Life Sciences for the exclusive supply of cannabis products into the UK, and has registered the first medicinal cannabis flower to be produced in Denmark. Little Green has recorded strong growth over the past couple of years, reporting a 30pc increase in sales in the March 2022 quarter over the corresponding period in 2021 which, when included in the 9-month annual reporting period to the end of March 2022, generated revenue for the period up 50pc on the previous 12 month reporting period. Despite Little Green’s operational and financial trajectory, however, the value of SEED’s holding has fallen since March from £2,028,000 to £1,313,000, mirroring the company’s plunging market price, down 37pc over the past six months.
The values of SEED’s stakes in Yooma Wellness and CiiTECH have also taken a hit. The company’s holding in Yooma, a Canada-based marketer and distributor of CBD and hemp-derived wellness products, has fallen from £351,000 in March to £130,000, making it now worth only 0.73pc of the company’s portfolio. 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. It 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. But the company’s shares have performed poorly since listing on the AQSE Growth Market, taking the value of SEED’s investment with them. SEED’s holding in CiiTECH, a brand building, consumer focused company dedicated to ongoing cannabis research and the commercialisation of cannabis products, is also down, from £188,000 to £110,000, CiiTECH’s hopes for a reserve takeover by Fragrant Prosperity Holdings Limited falling through earlier this year.
SEED has a cluster of smaller CBD holdings whose value has held up, including Northern Leaf, the the first company to be awarded a UK licence to grow medicinal cannabis in 22 years (accounting for 3.84pc of SEED’s portfolio and worth £686,000) and South West Brands (3.03pc worth £540,000), a London-based group developing consumer CBD products including LoveMeMeMe and FEWE, available at Superdrug and online at ASOS.
Beyond the CBD space SEED has significant holdings in the tech sector. The company dedicates 15.28pc of its portfolio – equivalent to £2,726,000 – to a holding in Juvenescence, a therapeutics start-up developing multiple therapeutics focused on extending human lifespans. Juvenescence is invested in MDI Therapeutics, a US based company developing novel serpin-based therapies for the treatment of fibrosis and fibroproliferative disorders, and has launched Metabolic Switch drinks and powders that promise ‘the power of extra ketones to keep your body in deep nutritional ketosis for several hours’. The company is well funded for future development having raised $50m through a convertible loan note in anticipation of a stock market listing. SEED also has a stake worth £585,000, equivalent to 3.28pc of the company’s portfolio, in the Clean Food Group a UK-based cellular agriculture company focused on the commercialisation of palm oil by fermentation. The Group owns the IP for a platform that produces a bio-equivalent palm oil alternative using microbial fermentation, a technology acknowledging growing concern about the environmental impact of traditional palm oil production. The values of SEED’s holdings in both Juvenescence and the Clean Food Group have increased in the past six month, shooting up in the case of the latter from £46,000 to £585,000.
SEED has had less fortune with its its 43.49pc share in Leap Gaming, the largest of all its holdings constituting 34.02pc of its portfolio, the value of which has fallen since March from £8,270,000 to £6,069,000. Leap is a developer and provider of 3D gaming technology and products with a focus on virtual sports and gambling, partnering with top-tier online and land-based gaming companies to provide advanced gaming products for end-users. Jurisdications in which Leap is licensed include Malta, Italy, Spain, Sweden, Holland, Latvia, Greece, Spain, Romania, Bulgaria, South Africa, Colombia and Georgia. Leap has also been granted a content supply license by the United Kingdom Gaming Commission, which is expected to unlock opportunities for its existing content portfolio through its current estate and immediate pipeline. Leap has established several new partnerships including Slotscalendar as new media partners, Videoslots, Gamblorium, a website that makes online gambling safe and convenient, and a further partnership with CasinoHEX, and has enhanced its expanding aggregation platform with Pariplay’s advanced iGaming solution. But Leap’s issue of a convertible loan note and management options have reduced the value of SEED’s holding. Last month SEED acknowledged that a €22.3m valuation of Leap posited in March is now ‘unlikely to be achieved in the foreseeable future via normal M&A activity in the current market’. The likely realisable value of Leap has been re-assessed in the region of €16m.
SEED’s latest portfolio overview reported an overall reduction in the fund’s net asset value to £17,841,000 as at 31 August 2022 from £20,461,000 in March, for the most part attributable to deteriorations in Leap Gaming and Little Pharma. The company’s most recent annual report stated that ‘the board is still confident of the opportunity cannabis companies present to investors; with two verticals, the first prescription medicines, where the core of our current cannabis investments lie, and the second over-the-counter CBD products, there are multiple revenue streams available to investors.’ It would not, however, seek to take advantage of current low CBD prices by increasing its holdings in the sector: ‘Although we believe the cannabis industry continues to offer opportunities for growth, we have had to deal with sectoral derating in recent periods, with share prices of cannabis listed companies seemingly not finding bottom over the last 12 months. However, we are not sector buyers; we are very selective pickers of the operators that we think will win.’
The CBD horizon
The chequered progress of SEED’s investments reflects the failure of the wider CBD market to realise investor expectations during the brief boom early last year. To be blunt, as the Financial Times’ venerable Lex column puts it, ‘pot stocks have been a crushing disappointment to the retail investors who jumped into the market when they listed in the mid to late 2010s.’
Certainly, progress has been slow. The UK legalised medicinal cannabis in 2018, allowing doctors to prescribe it for medical use, and the Financial Conduct Authority (FCA) 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 in 2021 after several high profile IPOs. But the British 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 cannabis 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 it 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 many US states. But state-by-state regulation in the US makes it difficult for companies to scale. Financial services companies are wary of providing lending and payment processing services in the absence of consistent regulations at federal level, which also deters institutional investors with the financial firepower to commit long-term patient capital to the sector. There are also concerns about high prices: research from the Cato Institute, a US think-tank, found the price of high‐quality marijuana was around $230 per ounce in Washington state.
High hopes early in 2020 that the liberal Biden administration would be able to push through federal legalisation 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 over the past two years. The ETFMG Alternative Harvest ETF is down 88pc from September 2018. US cannabis stocks have, however, rallied somewhat in response to a decision by President Biden earlier this month to issue a mass pardon for all people with convictions for ‘simple possession’ of marijuana under federal law. Speaking a month before crucial midterm elections, the President urged governors to do the same for state offences, saying convictions had led to people unfairly being denied employment, housing and educational opportunities. He also said he was asking the US Department of Health and Human Services and the attorney-general to review how marijuana is classified under federal law: marijuana is still classed as a ‘schedule-1 drug’, in the same category as heroin. A Gallup poll conducted last year found a record 68pc of Americans supported legalising marijuana.
Assuming the trend to gradual liberalisation continues, the long term outlook for the CBD industry looks promising. The global market for CBD, medicinal and recreational cannabis was worth $37bn in 2002, according to market intelligence firm Prohibition Partners, and the huge US market grew to $100bn in 2020 from $20bn in 2014. Progress in Europe is likely to edge forward, though Germany’s plans to legalise marijuana, if successful, could spark a domino effect across the continent. 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 FSA is enforcing stricter regulations for CBD edibles. This spring the Agency published a list of 3,500 ingestible products with CBD that are in the process of gaining approval for sale. Thousands of products and brands linked to unsuccessful applications have been removed from sale, but the clampdown has been welcomed by 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’. Several of the CBD products sold by SEED’s portfolio companies have been included on the FSA’s list, enabling them to continue in the market and progress through the validation stage, including those from investee companies Yooma Wellness, South West Brands and CiiTECH.
Though several of the company’s holdings have made operational progress, positioning themselves in a market that is opening up, however slowly, this year’s downturn in growth stocks, and CBD stocks in particular, has not been kind to SEED. The company’s share price is currently bumping along at 2.5p, down two-thirds over the year, reducing its market cap to £5.11m. Occasional speculation this summer about an upturn in growth stocks has quietened as the global economic outlook continues to darken. It’s certainly possible to view SEED as a slow burner, a carefully compiled set of growth stocks ready to ignite under favourable market conditions. At such a low price it’s arguable this is a bargain share. But when those conditions might arrive is, right now, impossible to say.