Hempco Food and Fiber’s (TSXV: HEMP) On Pace For Sizable Sales Growth

With contracts signed, demand for Hempco Food and Fiber’s products remain healthy

SmallCapPower | December 8, 2016: With the explosion of hemp seed demand in South Korean, Hempco Food and Fiber Inc. (TSXV: HEMP) has found itself in the right place at the right time, with the right product. Five years after the disastrous 9.1 magnitude earthquake unleashed the tsunami that crippled the Fukushima Daiichhi Power Plant Complex, the citizens of South Korean are looking for safer food alternatives to fish that have similar nutritional properties. Although this is the largest driver for Hempco right now, there are other macro trends that will help support the growth of its business.

 

Related: Hempco Food and Fiber is a Leading Hemp-Based Food Industry Contender – Ubika Research

Industry Context

Global food trends are also seeing people lean more towards healthier foods, including those that are natural, non-processed and ‘functional’( high in fiber, protein, vitamins and minerals) according to Neilson’s 2015 Global Health and Wellness Survey. Consumers are focusing on foods with these types of characteristics because people are trying to get the most out of their food by consuming ‘functional foods’ that can either reduce the risk of disease, promote health or both. These findings were further explained by Neilson’s 2016 What’s in our Food and on our Mind Report by the fact that we have “… a rise in self-care, treatment and prevention; and [an] increasingly educated and connected consumer.”

This is where hemp comes in.

Hempco’s Products

When you look at the products that Hempco offers they are exactly what consumers are looking for. All of their products are responsibly grown with no pesticides or fungicides and certified organic, non-GMO, and packed with all the ‘functional’ aspects. In Figure 1 below, we compare a 30g serving of Hempco’s Hulled Hemp Seed Nut, to an 85g serving of pacific herring. A single serving of Hempco’s protein powder, compared to the serving of fish, is 50% protein vs. 21% for the fish, while still providing you the same amount of the healthy polyunsaturated fats to promote metabolism, and none of the cholesterol increasing saturated fats.

Figure 1: Comparison of Hempco Protein Powder (right) to Pacific herringimage_1

All of Hempco’s bulk products offer a superior food alternative in terms of a clean and nutritionally packed snack. With the recent launch of its retail brand Planet Hemp, which shipped to the UK in May 2016, and began sales there and in Canada in September 2016, Hempco is further providing consumers with healthy alternatives that can be easily worked into a diet.

Hemp Market

Figure 2: US Imports of Raw Hemp Products

image_2This type of demand and growth comes as no surprise to the Canadian hemp industry. According to numbers released by the Hemp Industries Association (HIA), the U.S. generated USD$573mm in hemp product sales in 2015 of which, USD$283mm was foods, supplements and body care products. A large majority of the product that fueled those sales came from Canada and sales are expected to hit $1.8billion in the U.S. by 2020; that’s a year over year increase of 26% in that country alone. After 2015 saw a record 85,000 acres of hempseed planted that produced a large amount of overstock, Kim Shukla, of the Canadian Hemp Trade Alliance, estimated that there was only approximately 30,000 acres planted in 2016. This drop in acreage planted has had hemp farmers all across the country scrambling to meet the new Korean demand. Fortunately, due to the overstock produced from robust yields, there could be enough to satisfy demand.

Hempco has seen such high demand for its product on the market, that as of December 2016, CEO Charles Holmes said they have already taken about one million pounds from the overstock. This demand isn’t expected to stop anytime soon as customers in Korea prefer Canadian hemp products for the quality that is associated with Canadian product versus its Chinese counterpart.

Set For Growth

Having solid sales growth of approximately 37% year over year from $4.1mm to $5.6mm between fiscal 2015 and 2016, Hempco is on pace to see sales almost triple. After the hemp seed craze that swept the country of South Korea started last November saw 10,000 kilograms of supply sell out in less than an hour, Hempco entered into an exclusive contract in April 2016, with South Korean trading company Seoulution Corp. (“Seoulution”). This contract, worth $3mm was to be monthly orders of 30 tons of hulled hemp seed for a full year.

Seven months later, in October of 2016, the demand in South Korea was so large, that the $3mm worth of product had already been shipped, and Hempco signed a new deal for triple the value. Seoulution has now signed a new deal that commits them to purchase a minimum of an additional $9,000,000 of hulled hemp seed nuts/hearts over the next year. Considering that Hempco has sales of over $1mm in September before the contract was signed, this will put Hempco’s revenues inked in for at least $10mm for fiscal 2017, and that is just for bulk foods, and just one of the three products.

Now that the Company is also into the full-scale launch of its retail brand, PLANETHEMP, in Canada and the UK, you can expect sizeable revenue coming in from that business arm as well. Month over month sales from September to October grew from $1,000 to $50,000, and you can expect the sales numbers to follow that trend. With planned expansions in Canada from 200 stores by the beginning of 2017 to 800 stores by spring time, Hempco will have the momentum to continue this run.

Where Hempco Stands

Hempco currently has a small amount of liabilities and strong cash flow after completing its private placement in August for gross proceeds of $2.2mm, which puts it in a good position to focus on increasing production to meet demand. Hempco increased processing capacity of hulled hemp seed nut from 120,000 lbs/month to 200,000lbs/month. As they move forward and finish the installation of the new processing equipment at their new location in Nisku AB, they plan to increase hulled hemp seed nut increasing capacity from 200,000lbs/month to 500,000 lbs/m by April 2017. This will also help to improve their margins from 30% in 2015 and 2016 to their goal of 40% for 2017.

In the research report released by Ubika Research (view it here) on October 12th, 2016, it was estimated that Hempco will see its revenue grow to $15.7mm for fiscal 2017, which puts Hempco at an Enterprise Value to Forward Revenue ratio of 1.7x. When compared to other companies in the space that were acquired, the average ratio is 3.1x, well above Hempco’s and could signal a strong opportunity for investors, especially knowing that sales figures for the month of November should be released this week.

To find out more about Hempco Food and Fiber Inc., please visit the company’s Investor Hub.

 

Ubika Research/SmallCapPower has received compensation from Hempco Food and Fiber to provide analyst research coverage. For full disclosure please visit here >>

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