Asset-Light Expansion Into $8B German Market Adds Potential To This Cannabis Stock On NASDAQ

The potential rescheduling of cannabis in the U.S. and the growing demand in Germany positions InterCure INCR, the leading seller of pharmaceutical cannabis outside North America, to capitalize on these opportunities, according to a recent initiation note by Pablo Zuanic of Zuanic & Associates.

Zuanic highlighted said that "InterCure's experience in Israel, a market five years ahead of Germany in development, gives it a competitive edge." He also noted that "down the road, INCR could enter the U.S. market if FDA-approved and controlled pharmaceutical cannabis is federally legalized. In a global industry context, InterCure has strategic value."

Market Position And Growth Potential

InterCure has a significant presence in Israel, accounting for 98% of its sales, and is poised for substantial growth due to recent regulatory changes, expected to result in a 2-3x increase in demand.

The company's expertise in pharmaceutical cannabis positions it as a strategic player in the global market. "InterCure has strategic value with its ability to produce quality flowers at scale under strict GMP standards," Zuanic wrote.

Financial Performance

Despite disruptions caused by the Oct 7 attacks, which led to a 50% drop in 4Q23 sales, InterCure is expected to rebound with double-digit sequential growth throughout 2024.

The company's southern facility, which was damaged during the attacks, is anticipated to resume production by late 3Q24 or early 4Q24. Zuanic projects the company will reach a year-end 2024 sales run rate similar to 3Q23 levels, driven by growing domestic demand and entry into the German market.

The company anticipates higher profit margins, low capex needs, and low debt at 0.17x sales and 1x EBITDA, with potential government compensation of $30-50 million for asset loss and business disruption.

International Expansion

InterCure is expanding its footprint beyond Israel; it is preparing to enter the German market by mid-2024, with a local partner assisting with EU GMP and direct sales to pharmacies. According to Zuanic, InterCure expects it will be able to gain market share from Canadian LPs and Dutch companies by leveraging its experience in Israel.

Pharmaceutical cannabis imports in Germany reached 31 tons in CY23, "up 26% year-over-year after 20% growth in CY22 and 70% in CY21," according to Zuanic. He noted that "about 50% of MMJ imports came from Canada, 14% from Portugal, and 8% each from Denmark and the Netherlands."

With MMJ now removed from the narcotics list, Zuanic expects prescribing cannabis to ramp up. He conservatively estimates that "if we assume 1% population penetration by the end of 2025 (and $200/month spent), the market could be at an annual run rate of almost $2 billion." Furthermore, "if we consider 3-4% penetration, the market could reach $6-8 billion."

InterCure's international expansion will mainly involve partnerships, keeping additional capex needs minimal. The company is also negotiating an acquisition in Australia and has a CBD store in Switzerland under the Cookies brand.

Valuation And Projections

InterCure's shares, which have tripled since their November low, are valued at $3.10 as of late May. The market cap stands at $151 million, with an enterprise value of $165 million. Zuanic estimates that the stock could be worth 5x its current value under certain scenarios, driven by domestic market growth and international opportunities. The base case projection sees the share price reaching $6-9 by December 2025.

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Strategic Value

InterCure's strategic value lies in its historical know-how in pharmaceutical cannabis and its ability to produce quality cannabis at lower costs than European and Canadian competitors.

The company operates two production facilities in Israel and has supply agreements with companies in Canada and Portugal, along with a co-packer in Germany.

InterCure's partnerships with brands like Tyson and Humboldt further enhance its position. While international sales currently account for only 2% of revenues, Zuanic is confident in InterCure's potential to scale globally.

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