A few key items to note in the coming weeks: 1. Quarterly due in...

A few key items to note in the coming weeks:
1. Quarterly due in 2 weeks time then Annual Report not long after.
2. Updates on Precision Pharmaceuticals contract expiring today. Supplied $1.7m min in the past 12 months, extension of contract?
3. Update on supply agreements and potential increases to minimum order quantities.
4. Status of PCEs and Electricity grid upgrades.
5. Updates on strains for sale, export approvals etc

Side note, I’ve put together a spreadsheet of the absolute minimum income for ECS in the FY. Based on averaging the multi-year agreements across the term (assuming not forward or back weighted). So supply to: RAP, Rokshaw, MediCann, Entourage, Precision Pharma, Ilios Sante, Medropharm AG, Cannvalate, Koyi. Totals ~$19.2m/year in guaranteed contractual obligations. Reminder, this is absolute MOQ. With Nan indicating at every opportunity, that these minimums are often exceeded based on ECS’s capacity.

Say that the operating margin is the same as last year being 10%, that represents a minimum $1.9m NPAT. Improved margins to say 20% (in line with the margin of global producers), puts us at $3.8m absolute minimum. Given HY results and expected increases, it would be reasonable to assume closer to $24-26m in FY sales. That forecast now jumps to $4.8-5.2m NPAT or at the previous margin of 10%, $2.4-2.6m. Excluding the cash raise and money spent on increasing capacity from this cash injection from cash flow position (my way of determining long term value). We sit at a P/E range (based on current MC of $22m @1.7c) of at the lowest end being 9.2 all the way through to 4.2 at the upper end. Where this position sits when results are released could cause substantial re-pricing of ECS.

And a little kicker here as well, previously forecast income per PCE was in the range of $700k/year. Since this figure was released, R&D has increased yield by 100% utilising year round cultivation, as well as a 20% increase based on genetics. Given the total spend on 9 new PCEs + upgrades to existing PCEs is $3m, pay back period is near negligible. With expected 17 operational by EOFY, and increased yields per PCE/year. There is potential that each PCE could return $1.68m (the absolute most per PCE possible) and assuming operational costs increased due to full year operation. 17 PCEs = $28.5m in indoor
cultivation revenues/year.

Using contract estimated values, we fetch around $5-6m / tonne in revenues. Given from the Capital raise documents, ECS expected production in FY 24 is 6.2T, growing to 9.2T in FY25, full license amount of 13T in FY 26. We can expect if markets are stable, revenues to be $30-36m, $45-54m, $65-78m in the coming 3 FYs. Again, margins at 10% and 20%, put in NPAT of $3m-7.2m FY24, $4.5-10.8m FY25, $6.5-15.6m FY26. These numbers forward looking are phenomenal based on current valuation. At FY26, we could be looking down the barrel of a nice special dividend/profit distribution.

We know the on sale price from Curaleaf is ~£6.5/g, this equates to $12m+ AUD/tonne at the on sale per g price. Realising up to a 60% margin to the retailer. Now, think about how ECS can profit from keeping this market in house. Say sell to a white label company a ready to sell product that they receive an e.g. 30% margin on, they literally just sell the product that is labelled under their own brand, how easy! Now ECS margins are substantially increased. From a 10-20% margin on a retail price, now to 40-50% of the retail price ends up in their pockets. You can see why Nan has rattled the cage and opted for this business model. Because we can do it a) cheap and b) effectively. This is the number one reason why ECS is the most undervalued share on the ASX. Because investors don’t know of its existence or simply do not understand the business model alongside the global market, because Australia is relatively sheltered from the global industry.

IMHO, these are the numbers that institutions and competitors look at. They see that the payback period for a company like ECS is exceptionally short. I’ll probably be proven wrong, but, I believe that we are geared for a t/o. ECS is taking in the risk and building the facility to full capacity before someone comes in and acquires. Institutions don’t want to have to put extra money in and they want to mitigate risk. ECS is positioning themselves as a highly de-risked asset.

Forecast: FY24 (after results drop) ~ 2.8c-3.3c//36-43m MC, FY25 5.8c/75m MC, FY26 10.2c/132m MC. Based on a 15% ongoing margin at current expected capacity. But, given the business model in place, these margins could easily be 2-3x and hence, my forecast can also be 2-3x. Would be nice to see ECS at 20-30c operating at $250m-400m market cap and being a global player in the market. Still nowhere near the $5b AUD Curaleaf operates at, but still a major player potential regardless.

All views and numbers are my own, they are based on data available on the asx but are not substantiated. DYOR, I do my own, for myself, but enjoy sharing with people my thoughts and opinions.