The North American cannabis industry has struggled over the past couple of years, but fundamentals are improving and valuations are becoming attractive. As North America continues to grapple with excess supply issues, challenging margins and regulations, investors are starting to turn their attention toward European markets that are in the early innings of adoption and poised for hyper growth opportunities.

In this article, we’ll take a look at how to invest in Europe’s next cannabis leader, Franchise Global Health (TSX-V: FGH). 

Europe is a Cash Cow Business

North America represents more than 95% of the $16.5 billion global legal cannabis market, according to Statista, but Europe offers far superior margins and significant long-term growth potential. As a result, companies operating in Europe could experience better economics than the saturated North American markets, as well as more long-term growth potential.

Currently, the average retail price of medical cannabis in Germany is almost 2-3x higher than major North American markets currently standing at C$30 per gram in Germany compared to C$13 in the U.S. and C$10 in Canada. Moreover, the German government fully reimburses 62% of medical cannabis patients through insurance schemes.

Germany’s move to legalize recreational cannabis over the coming quarters could pave the way for other European countries to do the same. With a larger population than the U.S. and Canada combined, Europe could become one of the fastest growing and largest cannabis markets in the world over the coming years as these trends unfold.

According to the Brightfield Group, Europe’s cannabis industry could reach $4 billion by 2025, nearing the $4.4 billion in sales in California—the largest single market in the world. And Germany alone could become a $1.2+ billion market over the same timeframe. These are significant numbers that investors cannot afford to ignore.

Leverage First-Mover Advantage

Franchise Global Health (TSX-V: FGH) has a clear first-mover advantage in Europe having received the very first import and distribution license in Germany, Franchise sold the first gram of medical cannabis in the country and is now selling to over 1,200 pharmacies. Strong relationships have been forged with this large network, which is critically important and a remarkable feat given the highly fragmented nature of the market. 

In addition to their impressive retail network, Franchise is also selling over 700 skus of various pharmaceutical products to their mass pharma distribution networks which spans across 18 countries in the EU. This vast retail and wholesale operational footprint provides another competitive advantage to Franchise as they are favorably positioned to move quickly to capitalize on opportunities as market dynamics and regulations continue to progress.

The company has also secured 500,000 sq ft of reserved cultivation capacity and 30,000 sq ft of processing capacity at an EU GMP facility. This supply capacity could meet the demands of the growing European market and other global markets that are looking for consistent supplies of high quality EU GMP certified cannabis. These facilities are scalable up to 65,000 kilograms per year, which could also pave the way for significant revenue as European countries begin to explore and adopt recreational cannabis programs over the coming years.

Looking Ahead

Franchise Global Health (TSX-V: FGH) represents a compelling opportunity to invest in Europe’s next cannabis leader. In addition to its operational progress, its experienced management team has been a strong steward of capital, raising over $56 million in private equity to date, without any dilutive warrants affecting shareholders. This capital markets experience and expertise from Franchise’s leadership team will serve them well as strategic accretive M&A paired with organic growth are key pillars of their plan to continue to build long-term shareholder value.

The company also trades at an attractive valuation compared to its Canadian peers, including Tilray, Canopy Growth, Aurora, and others. For example, its CY22E TEV/Revenue multiple stands at just 2.0x, compared to 4.3x for its peer group. And its CY23E TEV/EBITDA multiple is projected at 18.3x versus a 29x peer average. Investors may want to pay close attention as the company works towards taking a foothold in Europe.

Disclaimer

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About Ryan Allway

Mr. Allway has over a decade of experience in the financial markets as both a private investor and financial journalist. He has been actively involved in the cannabis industry since its inception, covering public and private companies.