During the month of March, specialist investment company Hygrovest Ltd (ASX:HGV, OTC:MMJJF) increased its Net Asset Value (NAV) before provision for deferred tax by around 14% to A$0.1101.
There has been a relatively strong increase in the valuations of the company’s legacy investments in March. These investments were made in cannabis before HD Capital Partners Pty Ltd was appointed as investment manager in 2023.
Best performers
In its monthly Investment Portfolio Performance report, Hygrovest said the increase was primarily due to a 31% increase in the Enterprise Value to Net Revenue Multiple (EV/NRM) valuation multiple applied by HGV to Weed Me Inc.
That multiple is derived from the end-of-month market valuations of various listed Canadian companies, each of which HGV considers to be broadly comparable to Weed Me.
Another considerable factor behind the lift in NAV was a 23% increase in the EV/NRM valuation multiple applied by HGV to Southern Cannabis Holdings (SCH).
That multiple is derived from the end-of-month market valuations of various listed Australian companies, each of which HGV considers to be broadly comparable to SCH.
HGV also applies a 15% discount to the derived valuation multiple to account for the fact that Weed Me and SCH are unlisted.
The year-to-date performance of Hygrovest.
HGV major investments
Hygrovest is an Australian-listed, specialist investment company that has traded on the ASX since 2015. Its investment manager is HD Capital Partners, which was appointed to that role for five years commencing July 1, 2023.
The company was a foundation investor in Weed Me in December 2017. Its investment comprises 4.24 million shares representing about 13% of issued capital. As at March 31, HGV had ascribed to these shares a valuation of C$2.17 per share.
It also holds 460,830 Weed Me warrants each convertible at C$2.17 with an expiry date of October 29, 2024.
HGV became an investor in SCH in April 2018 and its investment currently comprises 21 million shares representing about 18% of SCH’s issued capital. At month end, HGV had ascribed to these shares a valuation of A$0.21 per share.
The company was also a foundation investor in Delivra Health Brands Inc (DHB). Its investment in DHB currently comprises 55,557,994 common shares representing an approximate 18% shareholding.
Hygrovest’s investment portfolio.
Hygrovest values its unlisted investments using a range of listed comparable businesses and their multiples and then applying a discount to account for the illiquidity of being unlisted.
Cannabis index rises
Most of these are listed in Canada, as is HGV’s largest investment in Weed Me, and it was these companies that HD stated performed strongest in March.
As an example, the Canaccord Genuity (TSX:CF, LSE:CF) Canadian Cannabis Index, a collection of companies tracked by global investment bank Canaccord, was up 46.1% during March and HD said this performance was driven by several (potentially very positive) regulatory headlines globally.
The most prominent for Canadian-based cannabis companies is the recommendation to review the excise tax model and impose a cap of 10%, as the tax was originally intended, but due to the substantial decline in wholesale pricing over the years has resulted in effective excise tax rates double or triple that.
HD said that if this recommendation was implemented it would result in a material uplift in profitability for most Canadian cannabis companies, including Weed Me, and the public markets reflected that possibility in March with a re-rating of listed valuations.
Changes in Germany
The second positive development, it said, was the removal of cannabis from Germany’s narcotics list effective April 1, 2024. Germany is a market with relatively high Canadian company participation.
Finally, in the report, HD said there was some expectation in markets for a positive announcement from the US Drug Enforcement Agency (DEA) with regards to a reclassification of cannabis to a Schedule III drug.
This would substantially reduce taxes paid, improve access to capital (both debt and equity) and likely drive an increase in valuations and investor interest.
"For many years, the cannabis industry has struggled with oversupply of product, burdensome regulatory conditions and a lack of access to capital, leading to depressed valuations and a flood of company failures," HD said.
These headlines "are potentially positive for the sector and while cannabis is no longer the focus for future investments by HGV, the legacy portfolio means that outcomes of some of these proposals will have a material impact on performance in the medium term."