Faircourt Asset Management Charles Taerk Examines MedReleaf (Video)

Faircourt Asset Management CEO Charles Taerk breaks down the business of MedReleaf Corp (TSE:LEAF) (OTCMKTS:MEDFF) (FRA:MEW) and how they are positioned for success.  Charles also speculates on the interest Aurora Cannabis Inc (TSE:ACB) (OTCQB:ACBFF) (FRA:21P) has taken in MedReleaf.

TRANSCRIPT:

James West:    Hey, welcome back to Midas Letter Live. My guest this segment is Charles Taerk. He’s the President of Faircourt Asset Management, who are the portfolio advisors to the Ninepoint UIT Alternative Health Care Fund. How was that, Charles?

Charles Taerk: That was great, that’s a mouthful!

James West:    That is a mouthful! I guess it’s been a couple weeks since we’ve chatted; I’ve noticed the fund has got a new name.

Charles Taerk: Yes.

James West:    And what’s the origin of that?

Charles Taerk: So, very exciting – we joined forces with Ninepoint Partners, the former Sprott Asset Management. They recognized what we were doing in the cannabis space about four or five months ago, and wanted to get into the sector, looked at what we were doing from an active management standpoint, and we came to agreement. They basically bought the contract from our previous fund’s sponsor, and now we’re rolling out with Ninepoint. They’ve got a lot of support from their own advisors and their own sales and marketing team, and we expect big and better things to come.

James West:    Great! So has it resulted in a capital infusion into the fund?

Charles Taerk: A little bit, it’s going. It just started two weeks ago, but I’m very proud to say that as of the end of April, performance-wise our one-year number to April 30^th is over 40 percent.

James West:    Congratulations.

Charles Taerk: Yeah. So performance is still going. Thank you.

James West:    That’s great. Okay, so we’ve been talking in our last few segments about some of the names that you think, are, you know, better chance of success at delivering a positive experience to its investors, to put it politely.

Charles Taerk: Yeah, sure.

James West:    And you mentioned a company that has jumped into the news recently as a result of speculation on a potential takeover/merger/business combination, whatever it ultimately ends up being called. MedReleaf has been a long term portfolio holding of yours and a company that you’ve spoken very positively of, and there’s, we’re not sure exactly the nature of what the potential transaction might be, but they’re talking to Aurora.

Charles Taerk: Sure. So yeah, you’re right – we’ve owned MedReleaf since it went public almost a year ago, and the MedReleaf team is a very solid management team. They have executed on their business plan virtually perfectly, and they’re a low-cost grower even though they are an indoor producer. And that’s really difficult to achieve, because indoor grow is a little more expensive relative to greenhouse. So they’ve got a lower cost per gram while also producing a premium product.

James West:    Sure.

Charles Taerk: So, terrific. The most recent quarter, they did have a little slippage in their cost per gram; it went up to $1.83, and that’s funny, because some growers aren’t even down to $1.83. they had some expenses related to expansion at their Brantford facility, so temporarily their costs are up, but we expect that to be temporary and come back down to their $1.50 level which were the previous quarters.

But more than just, you know, being efficient operators, they’re innovators. They have a very global-oriented focus. They’re the only Canadian company in the cannabis sector that’s ISO-9001 as well as GMP certified. So, ISO-9001 means very solid management practices, and then the GMP certification for export for pharmaceutical products.

So you know, they really hit on all aspects of their production. But they’re also innovators. Last year, MedReleaf was the first Canadian LP to launch oil capsules. They then came out, I think, the next month and launched CBD topical cream. So, two breakthrough products.

So you’ve got very efficient operations, premium product, and now they’re innovative as well – so we like them for both of those metrics. They have about 20 percent of the Canadian medical market. Patient growth is still quite strong.

James West:    Oh, they’ll talk to you about that, will they? They won’t tell me what’s going on there. He says ‘we don’t disclose that’. I don’t give him a hard time about it because I want him to come back, but…

Charles Taerk: No, that’s right. They share selectively.

James West:    Right.

Charles Taerk: And they have a very strong research focus as well, to support that medical focus.

What’s been surprising is that they have also looked at their rec strategy, right? We know that the recreational market is going to open up soon; June 7^th is the date when the Senate and the House of Commons will be doing their final reading, and so, how are the companies being prepared or readied for the recreational market?

MedReleaf is holding right now, based on consensus estimates, they’re holding probably the second-largest inventory of product that will be available for the rec market, second only to Canopy. So talking about medical, talking about recreational, they’re really firing on all cylinders.

James West:    Sure. Do you think that’s the reason Aurora is attracted to MedReleaf, and again, obviously we can only speculate –

Charles Taerk: Right.

James West:    Do you think it’s because MedReleaf comes with such a well established brand, a well-established management and operating team?

Charles Taerk: Well, sure. I mean, I think it’s not just the management team. Aurora has a management team of their own; the recent acquisition that they made of CanniMed, also a very medically-focused, well-regarded group, I think that Aurora has still some projects to complete. So let’s say there’s execution risk on the horizon for Aurora that isn’t necessarily there with MedReleaf; MedReleaf has most of its cultivation currently being grown, whereas a lot of the cultivation for Aurora is called planned capacity.

James West:    Right.

Charles Taerk: So the question for investors is, how far along are you in your expansion? When are you at complete cultivation, or even close to, you know, your near-term expectations? So, a MedReleaf acquisition – and again, this is all conjecture –

James West:    Sure.

Charles Taerk: A MedReleaf acquisition for Aurora gives them more current product, obviously a premium product, and it gives them Eastern Canadian exposure. Remember, Aurora is the largest licensed producer in the west, so it makes perfect strategic sense for Aurora to look at MedReleaf, wanting to be more nationally diversified.

James West:    Sure. Sure, okay. So you know, increasingly we sort of see that the media interprets what’s going on in the cannabis space in Canada, they’ve categorized it more or less for better or worse as Aurora and Canopy, battling it out for global dominance in all the markets of the world.

Charles Taerk: Sure.

James West:    And so, in that particular sort of context, do you see one naturally predisposed towards victory over the other, given everything we know about both companies? Or do you think that there’s room in this world for both an Aurora and a cannabis, to have shared global domination?

Charles Taerk: Sure. Look, I think no one company is going to have global domination. I think that clearly Canopy is the market leader; they’ve got seven facilities across the country, they’re represented in six or seven different provinces, so from a national footprint, Canopy is the number one. By the end of this year, they will have at Canopy 5.6 million square feet of cultivation that is being grown on, like in December. So Canopy is the leader.

I think what Aurora focuses on is, if Canopy is number one, we want to be a close number two, so we need to build our capacity. We want more facilities. And, you know, give it to Aurora – you got to give them some credit – is that they have a great market value, they have great perception, great following in the capital markets. A lot of active investors, there’s a good amount of liquidity on the stock, and investors have generally had a good experience. And I think that’s why Aurora and MedReleaf are teaming up.

MedReleaf, on many operational metrics, may be perceived as being more profitable – sorry, not may be, they are more profitable than Aurora. But Aurora has almost double the market cap of MedReleaf; their revenue numbers are roughly the same, and as I mentioned, MedReleaf has a better earnings profile.

James West:    Right.

Charles Taerk: So if you’re a MedReleaf shareholder, you might be frustrated to say hey, I’m backing a horse that’s doing everything right, but not getting the value, not getting the love in the markets.

James West:    Right, right. Okay, so looking at the Aurora/Canopy matrix on the global stage, how important is the concept of dilution? Because, you know, Aurora is over 500 million shares; Canopy is substantially lower than that. Does that make one more attractive than the other in terms of an investment going forward, if you’re a smaller investor?

Charles Taerk: Well, yeah, it’s something to keep in mind, that you’ve got one company that has made a number of more recent acquisitions where the value of both their own stock and the company the target stock are fairly elevated. So the fear of dilution is more present for Aurora shareholders. So you just have to be mindful when you’re looking at companies, that you take a look at, you know, the cost base, and where they might be moving next; these are the elements of due diligence that everybody should do. Difficult to do, but be very mindful of.

James West:    You bet. All right, Charles, we’re going to leave it there. Thanks for joining me again. We’ll come back to you soon and continue the conversation!

Charles Taerk: Terrific. Thanks for having me.

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Original article: VIDEO: Faircourt Asset Management Charles Taerk Examines MedReleaf

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