InterCure: Leader In Israel’s Growing Medical Cannabis Market (NASDAQ:INCR)

In mid-August, InterCure (NASDAQ:NASDAQ:INCR), one of the leaders in the global medical cannabis market and one of its largest producers in Israel, will publish financial results for the 2nd quarter of 2023. According to the Ministry of Health, the consumption of medical cannabis in Israel rose to 4.88 tons in June 2023 from 3.47 tons in June 2021.

In June 2023, the Knesset’s Health Committee delighted investors and the industry by announcing changes to current regulations governing access to medical cannabis. Under the first phase of the reform, patients suffering from certain diseases, instead of obtaining a license, which was time-consuming and bureaucratic, should now receive a prescription for medical cannabis, similar to a prescription for other medicines. These are just a few of the changes that have gone into effect, and discussions are currently underway to increase the list of diseases for which patients will receive a prescription and also consider removing the CBD component and other cannabinoids that do not belong to the THC family from Israel’s Dangerous Drug Ordinance.

But despite the positive news, over the past six months, InterCure’s share price has shown a decline of more than 6%, mainly due to the apathy among investors and traders regarding the future of the SAFE Banking Act.

We continue our analytics coverage of InterCure with an “outperform” rating for the next 12 months.

The financial position of InterCure and its prospects

InterCure’s revenue for the first three months of 2023 was $29.5 million, down 1.7% from the previous quarter and up 8.1% from the first quarter of 2022.

At the same time, InterCure’s actual revenue beat analysts’ consensus estimates only in four of the last nine quarters, which may indicate an objective assessment by Wall Street of the prospects for its activities in the current realities. We believe that despite the lack of revenue growth in recent quarters, Alexander Rabinovitch is coping with tougher competition in the industry and skillfully managing the company in the tense political situation in Israel.

According to Seeking Alpha, InterCure’s revenue for the 2nd quarter of 2023 is expected to be $30.47 million, up 5.9% from analysts’ expectations for the first three months of 2023. At the same time, following our model, the total revenue of InterCure will be slightly higher and amount to $31 million.

Continuing the month-on-month growth trend in the number of cannabis license holders in Israel will drive the company’s quarterly and year-on-year revenue growth. At the end of Q2 2023, the total number of licensed patients using medical cannabis products was 125,099, up 11,023 from the previous year.

On a more global scale, we expect that due to changes in current regulations governing access to medical cannabis, the increase in patients using it will accelerate. Under the first phase of the reform, patients with only the following conditions can receive medical cannabis through a prescription. This will significantly simplify access to medical cannabis and reduce the number of people who buy it illegally.

In addition, InterCure continues to expand its product range, including through deals with industry leaders. So, at the end of April 2023, a partnership was signed with former boxer Mike Tyson’s cannabis company to distribute, cultivate and manufacture all TYSON 2.0 products in Israel, Australia, and certain European countries.

The company’s operating income margin in Q1 2023 was 5.76%, a sharp recovery from the previous quarter due to price stabilization for medical cannabis products. One of the main reasons for the decline in InterCure’s year-on-year margins is related to the situation in the Israeli cannabis market that prevailed from November 2022 to February 2023. During this period, some participants in this market faced financial difficulties and decided to reorganize their businesses and sell their inventories at lower prices.

At the same time, we forecast that by 2023 InterCure’s operating income profit will continue to recover and reach 8.5%, and by 2024 this figure will grow to 13.4%, including due to an increase in the share of the European medical cannabis market and lower inflation.

The company’s earnings per share for the first three months of 2023 was $0, down $0.11 from the prior year. According to Seeking Alpha, InterCure’s Q2 EPS is expected to be $0.01. At the same time, we believe that the company’s EPS in the third quarter will continue to grow and amount to $0.04.

Furthermore, InterCure’s Non-GAAP P/E [TTM] of 6.60x is 65.67% lower than the sector average, which is one of the factors indicating that the company is significantly undervalued.

Risks

In our assessment, there are two main risks to consider that could affect both InterCure’s financial position and its share price.

The slow expansion of the network of pharmacies in Israel

InterCure, as the leader of medical cannabis in Israel, is constantly investing in expanding the network of pharmacies that sell the products of the company and its partners to increase market share.

However, on May 15, the company’s management reported failing to obtain licenses to sell medical cannabis for all seven in-process pharmacies, mainly due to police shortage. At the same time, one of the reasons for the shortage of police officers is the tense political situation in Israel caused by mass protests against judicial reform.

Decrease in the total amount of cash and cash equivalents of InterCure

Despite the company having a positive operating income, in the first quarter of 2023, its management decided to voluntarily repay loans of $24 million, which affected the reduction of InterCure’s cash and cash equivalents from $66.2 million to $29.6 million.

Conclusion

In mid-August, InterCure, one of the leaders in the global medical cannabis market and one of its largest producers in Israel, will publish financial results for the 2nd quarter of 2023.

Despite the difficult situation in the global medical cannabis market, the company’s revenue continues to grow yearly, thanks to Alexander Rabinovitch’s innovative business strategies. In addition, the Knesset’s Health Committee delighted investors and the industry by announcing changes to current regulations governing access to medical cannabis, making it easier for patients suffering from various diseases to obtain it. Moreover, at the end of Q2 2023, the total number of licensed patients in Israel using medical cannabis products was 125,099, up 11,023 from the previous year.

We continue our analytics coverage of InterCure with an “outperform” rating for the next 12 months.

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