The tacit legal nods given for the production and use of cannabis are gradually giving steam to companies venturing into this rapidly growing industry, even though the regulatory environment remains stringent.
One company making significant inroads in the business of marijuana is investment holding firm Labat Africa, which last year became the first listed company in the continent to have links with the emerging cannabis market.
The cannabis industry is estimated to be as large as R27bn in 2020, and many adopters of the crop are fast emerging.
Labat, which listed on the JSE 25 years ago, is geared to expand its operations in the sector through its health-care arm, though it’s still in the throes of raising capital.
The company, which previously was largely focusing on logistics and energy, has been making key acquisitions in line with its new strategy. By the end of 2021 it expects most of its revenue to be generated from cannabis.
In April, Labat announced its intention to raise R112m to help fund its expansion into medical cannabis. It has since extended its book build to the end of August as a result of ongoing presentations and due to Covid-19 restrictions.
Mike Stringer, Labat Healthcare CEO, says the company has already secured a R50m subscription from investment company Verityhurst.
These proceeds will be reserved for capital expenditure and working capital requirements for its medical and industrial hemp initiatives.
Stringer says part of Labat’s plans is to list the company on the Nasdaq exchange in about two years’ time in a bid to garner investments from "weed savvy" US investors. There it would join leaders in the cannabis sector such as GW Pharmaceuticals, Cronos Group and Tilray.
The company is eyeing the Eastern Cape as SA’s hub for the cultivation of the cannabis plant and is looking at developing 100,000m2 over time.
Stringer says the firm is working with the Eastern Cape government on a public-private agreement for a trial involving five farmers with hemp licences totalling 250ha of land to assess the financial viability of the project.
The company is on course to erect 1,500m2 of greenhouse structures on the only cannabis aquaponics facility in SA, Sweetwater.
Stringer says Labat has also signed an agreement in Gauteng to develop up to 10,000m2 of greenhouses over the next three years. To meet its offtake agreement, it would need to yield 5t-6t of cannabis flowers a year, he says.
Whether Labat becomes a success in the cannabis market remains to be seen.
Kasief Isaacs, head of unlisted investments at Mergence Investment Managers, says its own evaluation of about 15 cannabis opportunities in SA and Lesotho indicates that the average asking price for a single licence is about R200m. Some fetch as much as R400m, and that is to fund a small to medium-size cultivation and extraction site.
"Labat seems to understand this at some level, [judging by] the investments it has grouped under health care," Isaacs says.
"If [Labat] is starting the journey now, it is probably two years or so behind other Lesotho licence holders. And the reality is that the SA regulatory environment is still too uncertain to serve as a base for the rapid scaling of operations."
No doubt investors can become a bit starry-eyed about investments in a groundbreaking industry. Labat will need to deliver on some ambitious profit projections in the medium term, and finish off its capital raising exercise.
But for the risk-taking small-cap punter this might be a real buzz.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.