SHARES in Labat Africa, duel listed on the JSE and Frankfurt stock exchanges, yesterday soared 8.33 percent after the health-care firm, with a focus on medical cannabis, announced it had inked a R10 million deal to buy the major stake in an Eastern Cape-based firm as it gears up for green growth.
Led by its chief executive, Brian van Rooyen, yesterday Labat announced the purchase of 80 percent of Lima Romeo Air, known as Sweetwater.
“The acquisition of the Eastern Cape-based facility provides Labat with additional medical and pharmaceutical infrastructure in support of its healthcare strategy and enables Labat to accelerate the delivery on the off-take agreement with a Swiss pharmaceutical group,” it said.
Sweetwater is a South African Health Products Regulatory Authority approved medicinal cannabis cultivation facility in Kenton-on-Sea in the Eastern Cape of South Africa, owned by A de Jager (75 percent), S Booth (12 percent) and Ms P Gillies (3 percent), “who are not related parties to Labat”.
Labat said the remaining 20 percent would be retained by two shareholders, Booth (10 percent) and Dr Gallow (10 percent), who ran BioData Proprietary, in which Labat owned 70 percent.
Through the acquisition, Labat will get Sweetwater’s assets, which include all operating assets of the cultivation facility, plus 1.5 hectares of land, a 1100sqm Aquaponic Grow Facility, five grow tunnels as well as 216.27 kilograms of dried stock (10 kilograms of which had been pre-sold to Australia and did not form part of the acquisition).
Sweetwater’s results for the nine month period ending November 30, 2021, showed the net asset value at R6 722 021 with a net profit before taxation at R2 459 287.
In line with its strategy, the Labat Healthcare Roadmap, the company stated it aimed to establish the Ace Genetics Nursery for the African Genome and Landrace Project at the same location, towards the commercialisation of the Ace Genetics Seedbank in the third quarter.
This as the company in December 2020 concluded the acquisition of 70 percent in Biodata Proprietary, a research and development operation in cannabis, and the acquisition of 75 percent stake in Ace Genetics (formal name Leaf Botanicals Proprietary), a seed bank business, which had developed more than 50 strains of cannabis.
To grow this investment, Labat said Sweetwater would be supported by a team of highly skilled breeders, growers and researchers.
“This operation currently has an offtake agreement in place with an Australian pharmaceutical client and has also recently facilitated a number of transactions for the supply of Cannabis to Europe. Labat will use its funding lines and in-house expertise to make significant capital investments into the current facility and upgrade the existing infrastructure in order to increase the current production capacity from 500kg per year to 1.8 tons per year,” it said.
The capital investment would also be used to set up a EU Good Manufacturing Processes processing facility on the site with the assistance of a German pharmaceutical company.
The effective date of the acquisition was March 1.
The consideration of R10m for the acquisition would be funded through Labat’s cash resources. A deposit of 50 percent of the purchase consideration had been already been paid into a trust pending the conclusion of the deal, with all parties meeting the closing conditions of the sale by March 15.
This small cap, valued at nearly R122 million, listed on the JSE under the Venture Capital Market, was founded and incorporated in 1995 by Van Rooyen and Victor Labat and listed on the JSE in 1999 as one of the first listed black economic empowerment companies.
Just a mere three years ago, in 2019 Labat outlined its future repositioning strategy and value creation, transitioning the business from an investment holding company into a fully integrated cannabis business with a focus on healthcare, wellness and industrial hemp.
Labat then developed a complete repositioning strategy, which is currently being implemented.
Cannabis, for many years, considered an illegal drug, is now a nascent industry with dope horizons as world regulators open up their markets.
According to Statista, the US is the globe’s biggest and most sophisticated cannabis market valued at $61 billion (R937bn).
Recreational cannabis alone is predicted to exceed $40bn in annual sales by 2026.
Labat is positioning itself for the growth of this agricultural crop. On December 6 it listed on the Frankfurt Stock Exchange in the hopes to capitalise on Germany’s expected legalisation of cannabis for medicinal and recreational purposes.
South Africa is also looking into how it can seize this opportunity and growth the sector by creating business confidence through regulation and the establishment of a cannabis masterplan.
Recently, President Cyril Ramaphosa in his recent State of the Nation address, outlined his aspirations for South Africa to grow its hemp and cannabis industry in creating up to 130 000 jobs, by reducing red tape around permits and licences in the face of available export markets.
However, as Labat sees the potential ahead, the company so far has not impressed the market and took a massive knock last year amid that wrecking ball we know as Covid-19.
In Labat’s annual results for the year ended August 31, 2021, the company posted a total comprehensive loss of R22.8m, compared to the prior year profit of R10.1m, with revenue at R29.3m, down 27.3 percent on the prior year’s results due to Covid-19 disruption, which it said hampered growth in all the group’s segments.
Its gross margin increased from 31.7 percent from 2020 due to the firm’s new operating model adopted despite lower turnover levels during the Covid period and capitalisation of development costs.
Loss per share from continuing operations for the year was 5.7 cents per share compared to 16.4 cents in 2020, while the headline loss per share from continuing operations improved to 6.5 cents from a loss of 15.8 cents per share the prior year.
Property, plant and equipment increased by R117 000 during the year, with the right of use assets recorded an increase of R1.1m, which was mainly because of the increase in value on the new lease agreements entered into.
Labat has a price to earnings ratio of -3.69, with 507.82 million shares in issue.
In an analysis of the stock, Simply Wall Street's write up on the group notes that the company was trading at 28.7 percent below its estimate of fair value.
It said that the share was extremely volatile, without a meaningful market cap, added to which it had underperformed the South African market, which returned 11.4 percent over the past year.
However, Labat, might be getting its smoke rings lined up.
On December 3 the firm announced it had raised R300 million from Californian investors GR Global Ventures by issuing new shares at 50 cents a share.
At the time Labat explained that its initial capital-raising process had been severely impacted by the Covid-19 pandemic, which had resulted in slowing down the implementation of some of Labat’s pioneering cannabis initiatives.
It said with markets now beginning to re-open and investors on the look out for new growth segments, GR Global Ventures’s investment would accelerate the implementation and roll out of sector-leading initiatives and unlock key opportunities, including ongoing research through clinical trials, growth in the market, more customer engagements and further manufacturing.
The international investment into the business was a signal of the positive market sentiment with regard to the potential for growth in the cannabis sector, it said at the time.
To enable this strategy it listed in Frankfurt in December
Labat is now ready for action post- Covid.
Yesterday it explained that after its Frankfurt listing it had secured off- take agreements with buyers in Europe, particularly Switzerland and Germany, for the supply of cannabis products, which had led to it being regularly approached by international buyers of cannabis flower, for the supply of high quality THC flower from South Africa.
To level up, in January it announced that it had bought Miami-based CBD lifestyle brand Echo Brand, which comprises a diverse fast-moving consumer goods product portfolio.
The brand had also had obtained exclusive rights to distribute American pre-rolled hemp smokable Ace & Axle as well as their other products and would launch Delta 8 soon.
Echo Life and Ace & Axle now form part of Labat’s retail portfolio, which already includes Cannafrica, a medicinal and luxury CBD lifestyle brand, which opened four stores post year-end in the Cape, Hartbeespoort, Melrose Arch and Umhlanga with more stores opening in the coming months as well as an online presence.
As Labat seals the Sweetwater deal, it said yesterday, “This acquisition further enhances Labat’s position in the cannabis industry as the company continues to work towards its goal of propelling South Africa’s proposition to its rightful place on the world stage in the field of cannabis cultivation and medicinal cannabis supply.”
philippa.larkin@inl.co.za
BUSINESS REPORT ONLINE