Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Yesterday ECS Botanics Holdings Ltd surged by 46.6%. But why? Before we answer this all-important cannabis investment question, you must understand the background of ECS Botanics first. ECS is a Tasmanian manufacturer, producer, and supplier of industrial hemp. ECS Botanics wholesales products such as raw hemp oil and hemp flour and retails products ranging from hemp protein mixes to Indian curry bases with hemp. Tasmanian farmlands are well known for clean air, an abundance of water supply, and rich fertile soil grounds. In turn, providing ECS Botanics with high-quality hemp seeds.
Does ESC have the necessary Licenses?
Licenses ECS currently holds
- Tasmanian Industrial Hemp License for Commercial purposes – Cultivate, Supply & Manufacturer
- Tasmanian Industrial Hemp License for Research Purposes – Cultivate, Supply, and Manufacturer
- Queensland Industrial Hemp License for Commercial Purposes – Grower
- National Export License
- National Import License
Licenses under application
- National Cultivation of medicinal cannabis
- National Manufacture of Medicinal cannabis
Key 2019 events
- 13th August ECS secures strategic investment in TapAgrico
ECS Botanics made an excellent investment move by acquiring a 28.4% stake in Tasmanian Agricultural Producers Pty Ltd (TapAgrico) for 750,000. TapAgrico is a profitable Tasmanian grain handling, marketing, storage, and export packing facility. ECS investment will fund the purchase of a hemp seed dryer, storage, and handling equipment. These critical infrastructures will assist in the expansion of ECS cultivation.
- 13th August Retail Distribution agreement with Eden Foods
ECS Botanics strategic retail food distribution agreement with Eden Foods looks to provide promising revenue growth. Primarily because Eden Foods can retail ECS hemp products customers in IGA, gourmet shops, hotels, restaurants, and many more outlets.
- 12th September strategic memorandum of agreement with Caason Investments Pty Ltd (Caason)
ECS Botanics made an assertive decision by signing a non-binding Memorandum OF Agreement (MOA) with Caason. The deal will allow both companies to collaborate on R&D relating to harvesting and processing industrial hemp, share essential information learned about hemp farming, and develop export opportunities for selling hemp. If ECS can transition into a binding deal, ECS will hold a significant advantage in the newly emerging hemp market.
So why the 46.67% surge today?
Yesterday ESC Botanics opened at $0.045, rose to $0.066 at 11:00 am, and closed at $0.057. But why? The stock increased because of two events. Firstly, ECS signing of a national distribution agreement with Just Foods Australia (JFA) (31/10/2019). Under this agreement, JFA will distribute ECS Botanics hemp products across the entire Australian retail market. From mass grocery chains to pharmacies to independent retailers to even health stores.
More importantly was today’s ASX announcement of ECS securing the distribution, through JFA, of their 250 ml Hemp Oil products into 850 of 995 Woolworths stores. ECS is expected to dispatch their first order of Hemp Oil products into Woolworths stores on 13th January 2020. ECS distribution into Woolworths creates a significant revenue growth opportunity for the Hemp supplier. The revenue potential from this deal increased investor confidence. Thus, explaining the 41.46% rise in stock price today. However, the total revenue is unclear. Primarily because of the lack of a minimum number of Hemp oil products being guaranteed. The uncertainty will clear once ECS provides more information.
What does the future look like for investors?
ECS holds promising share price potential. However, here at YIG, we like to provide a balanced perspective for young investors.
First, the ECS Botanics share price is highly volatile. Primarily because of the uncertainty of the newly emerging hemp market combined with Botanics striking strategic alliances.
Secondly, ECS does not have a meaningful market cap with 28.93 million. In turn, classifying ECS as a Nano-cap and increasing the risk associated with the investment.
Moreover, the success of ECS operations is dependent on third-party distributor contracts. If ECS cannot maintain their distribution contracts with Eden Foods or JFA, then revenue, profitability, and growth could be adversely affected.
Lastly, institutional investors hold less than 5% of ECS Botanics. Less then 5% indicates that not many funds are interested in the business as we speak.
To conclude, the surge in share price yesterday indicates ECS Botanics are moving in the right direction. ECS securement of distribution deals with JFA and Eden Foods will allow the company to service the megatrend towards hemp usage. JFA’s experience with big brands such as Pepsi adds more confidence that ECS can generate revenue growth from these contracts. Moreover, ECS investment with TapAgrico provides vital assets to ensure Botanics can produce hemp at a high capability.
Despite the optimistic future, the smart investor must consider the weak fundamentals. These include the volatility of the share price, the low market cap, and the 94% decrease in revenue between (30th June 2018 – 30th June 2019). Furthermore, the dependency of distribution contracts and little institutional investment.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Associate at YIG