InterCure: A Cannabis Industry Leader Still Flying Under The Radar (NASDAQ:INCR)

Investing Thesis

InterCure (NASDAQ:INCR), a leading pharmaceutical/medical cannabis company based in Israel, and a global leader outside North America, has been hit hard by the Hamas attack and the war that followed and so has its stock. Despite these facts, the company managed to sustain operations and present positive 2023 results; the stock price also started recovering after market overreaction. While having the support of the state of Israel during this difficult situation, the company unfolds its profitable growth prospect and plans its international expansion. Furthermore, the pharmaceutical cannabis industry is poised for significant growth in the coming years. Therefore, investors should benefit from a stock price correction and initiate a position.

Company Overview

InterCure is a leading Israeli pharmaceutical/medical cannabis company. Its stock is publicly traded on the Nasdaq and the Tel Aviv Stock Exchange. Being vertically integrated, InterCure and its subsidiaries are involved in producing, manufacturing and distributing cannabis-based, GMP-compatible products. The company holds a license in Israel, where the market has been regulated since 2008 and aspires to become a global leader as long as certain states permit the distribution of its products.

InterCure’s largest production facility (southern facility) is located in Nir Oz Kibbutz near the Gaza Strip border; it is currently only partially accessible for operations because IDF use parts of the site. Before the Hamas invasion, the site could produce 7 tons of cannabis per year. The site is estimated to produce approximately 88 tons per year at maximum capacity under certain conditions. InterCure’s northern facility is located in Beit HaEmek Kibbutz. Its production capacity is approximately 3 tons and could reach 10 tons at maximum capacity. The company is entitled to full compensation from the Israeli government for the damage taken due to the state of war in Israel.

InterCure distributes its products through a network of 24 pharmacies (plus 5 more licence-pending) while holding agreements to form joint ventures with producers and suppliers in the EU and Canada in the future, depending on regulations and demand from certain states. In Germany, from 04/01/2024, the CannG Cannabis Act is in effect. InterCure is ready to benefit from this reform and launch its products this year, while expecting developments in the US regarding the so-called Cannabis rescheduling. In addition, InterCure will always have the option to make a move into recreational cannabis if an opportunity arises.

InterCure presents important partnerships in distribution and purchase agreements with many important brands of the Cannabis ecosystem. A Cookies store is operating in Austria and another one is expected to commence operations in 2024 in the UK.

The commitment of the CEO Alexander Rabinovich, the involvement of the former PM Ehud Barak who serves as Chairman of the Board, the insider stock ownership, and the presence of the Fegel family should also be considered positive facts.

Regarding FY 2023 ER, there was a 9% decline in revenue and a decline in EBITDA compared to 2022, however, considering the state of war in Israel and the impact that this condition had on InterCure 2023 ER should be regarded as positive. FY 2023 revenue and EBITDA also exceeded the company’s preliminary estimates.

Finally, it should be mentioned that the company has been involved in legal action with Cannolam minority shareholders and Cann Pharmaceuticals. The Cannolam case ended in favour of InterCure which now holds 100% of the shares in Cannolam. The Cann case is still active and InterCure is confident it will win the case that followed the failed merger with Better.

Industry Developments/TAM

The pharmaceutical/medical cannabis industry is in its early growth stages. Regulatory progress has been relatively slow, yet certain states are making steps forward. Year after year, the use of pharmaceutical/medical cannabis gains more supporters and more countries are getting prepared to pass relative legislation. Germany recently removed cannabis from the list of narcotics and in the US the rescheduling is expected in the coming months. More states will likely follow, boosting the TAM in the coming years. According to a Grand View Research analysis, the 2023 market size was estimated at ~$3.4B, while a CAGR of 53.3% to 2030 is expected. While this number may seem exaggerated, it shows a potential for excessive industry growth. Thus, a bright future is unfolding for the industry and InterCure, an industry-leading company, will certainly benefit from that.

Valuation

2023 was a year that brought many challenges for InterCure. While the stock has been suffering for some time, after the Hamas attack the sell-off brought it to an all-time low at $1. Following these events, the market started reflecting that the worst was back and acknowledging that InterCure was undervalued; the stock recovered to $3.73. InterCure presents a 0.98 P/S (TTM) ratio compared to 3.55 of the pharmaceuticals sector median. Taking a conservative approach, considering the pharmaceutical cannabis industry, certain peers, and risks, InterCure should have been trading closer to a 2 P/S (TTM). In other words, it could justify a price close to $4 per share in 2024 if the state of war in Israel gradually de-escalates.

Looking deeper into the future, a 53.3% pharmaceutical cannabis industry CAGR may seem overconfident for some, despite the industry being in its early growth stages. Thus, three more conservative scenarios will be presented on the path to 2030 assuming a P/S = 2 valuation.

1. 10% CAGR: ~$374M 2030 valuation
2. 20% CAGR: ~$688M 2030 valuation
3. 30% CAGR: ~$1.2B 2030 valuation

Trading at a $96M valuation now, well under its book value, shows InterCure’s poor valuation and unveils a potentially compelling opportunity for investors to multiply the invested capital in the future.

Risks

• An unexpected risk until recently, the Hamas attack and the state of war that followed in Israel has already impacted InterCure’s southern facility and its operations. While this condition is expected to de-escalate, and the company has full support from the state of Israel, it should still be considered a volatile situation.
• Another major risk is the possible delays in cannabis-related legislation approval by certain states. Conservative and far-right parties seem to have gained momentum in the recent EU elections, and that could prove an obstacle for further cannabis legalization.
• Finally, the company could present slower growth and lower profit margins than expected, competitors could gain larger-than-expected market share, new players could appear, and its international expansion plans may be delayed.

Conclusion

Wrapping it all up, InterCure is a profitable growth pharmaceutical/medical cannabis company and one of a few that managed to grow its business in tandem with a healthy balance sheet and strong results. Despite the state of war in Israel and the damage that was caused, the company seems to have a bright future to lead in an industry that has just begun its rapid growth. Expected patients and demand increase in Israel, the fresh Cannabis Act in Germany, and the Cannabis Rescheduling in the US, all signal a trend in favour of Cannabis and InterCure seems ready to move and seize the opportunity. Zuanic and Associates (Pablo Zuanic is a known cannabis analyst) recently initiated an overweight-rated coverage on InterCure and published their analysis. Considering the current conditions, a stock price exceeding $3 reflected a quite fair valuation for the company; this was why I sold 50% of my position (initiated at ~$1.60) for an over 100% profit during the recent rally at ~$3.40. Now that a stock price correction is underway, it is time to seek momentum to increase my position again, and so should investors interested in InterCure, anticipating to multiply the invested capital in the long run.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.