Cannabis Upswing: Rua Bioscience [NZX.RUA] Peaks at 5.26%

 

Rua Bioscience is one of New Zealand’s leading names in the domestic cannabis industry.

The share price surged as high as 5.26% today, at $0.40 per share.

The company currently has a market capitalisation of approximately $54.7 million.

Apart from having involvement in establishing the regulatory framework of the sector, Rua Bioscience focuses on the research, cultivation, extraction, and manufacturing side within New Zealand’s medicinal-cannabis supply chain.

Globally, the cannabis industry has made progress by leaps and bounds in recent years.

Much like a plant itself, the industry must receive enough sun and water in the shape of policy reform and adapted societal views in order to flourish.

As more countries begin to unwind their conservative judgement regarding cannabis, an emerging industry may be opening up. This may pave the way for bold companies to capitalise upon.

For Rua Bioscience, the foundation has been built, but the road is still long.

 

Why is [NZX:RUA] up today?

 

At this stage, price fluctuations are most likely the result of positive sentiments in industry growth worldwide. The progress and development in other countries will no doubt affect their New Zealand-based equivalents.

As positive news and sentiment begins to emerge in cannabis industries offshore, domestic investors may react with increased demand for local companies such as Rua Bioscience. 

Some of the recent global highlights to consider include:

  • The US House of Representatives approving the cannabis banking bill. On Monday, legislation was passed, allowing banks to provide services to cannabis companies in states where it is legal. This is a huge step for the industry as barriers to development have been removed. As a result of the bill, eligible companies may have access to more suitable funding arrangements, which may lead to increased production.
  • Increase in cannabis sales due to 4/20. For those of you who don’t know, April 20th is regarded as the unofficial stoners holiday. According to a data analyst at Headset, a cannabis business intelligence firm, sales may increase by at least 30% over the coming week as opposed to the previous four.
  • [NZX.RUA] announces a new executive with global pharma experience. The company has appointed new chief commercial officer, Dr Andrea Grant. She brings over 20 years of relevant experience. She will be driving Rua’s domestic and global commercialisation strategy. This recent hire may be an excellent move for the company as it may provide them with greater ties to global industry connections.

 

Where could Rua Bioscience go from here?

 

Right now, the cannabis industry is slow to develop and grow within the New Zealand market.

Development has been halted by events such as last year’s slim defeat in the cannabis legalisation referendum. A lack of further hype in the industry, mixed with the continued lack of policy reform, can explain why a profit has yet to be seen for any domestic cannabis companies.

However, what does the future look like for [NZX.RUA]?

Rua now holds an undivided distribution agreement with German pharmaceutical wholesaler Nimbus Health. The German cannabis market is estimated to be worth over NZ$1.4 billion by the end of 2024.

With the acquisition of Dr Andrea Grant, Rua may in a better position to find even more markets to export to.

 

Risk factors to consider

 

There are a couple of important things to note when assessing the company as it stands:

  • [NZX.RUA] is relatively small, with a low market cap and negative earnings. There is usually always a higher risk with smaller companies like Rua Bioscience. They are heavily dependent on political factors in order to drive demand and continued expansion. Due to their low liquidity, it is expected that they will need to make a profit sooner or later, or risk bankruptcy. 
  • As mentioned, the company relies heavily on factors out of their control in order to see great success. The cannabis industry has been making moves recently. However, the fact that the referendum did not pass last year is a concerning thing. How long will it take before Rua Bioscience will be able to service the demands of customers without being inhibited by law and policy? 
  • Another large risk to consider is competition. Rua is not the only New Zealand-based cannabis company. They have to compete with the likes of Cannasouth [NZX.CBD], and that is only domestically. Globally, other companies such as Canopy Growth [NASDAQ:CGC], have already found an aggressive footing in the legal cannabis market.
  • One thing Rua Bioscience [NZX.RUA] may have is the clean and green appeal that New Zealand exports are famous for. A point of difference that I believe could be marketed and leveraged in the company’s favour.

No doubt, the cannabis industry is a risky one and highly speculative. Rua Bioscience continues to remain a small cap stock with a significant risk profile.

Unfortunately, the ride to date with the [NZX.RUA] share price has been very disappointing for a new listing. After the IPO in October 2020 at $0.70, the share has languished below $0.50 the past few months. 

We will be continuing to watch for some more potential ‘breakout’ news. Though we do acknowledge small growth companies can take some years to hit their stride. That was certainly the case with the early days of companies like a2 Milk [NZX:ATM]. Except cannabis is a far more speculative, controlled, and increasingly competitive sector.

Discerning investors should carefully weigh their risk appetite on what the future prospects of the cannabis industry in New Zealand may be.

 

Regards,

Samael Knaap,
Analyst, Wealth Morning

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Sam is an intern analyst at Wealth Morning. He is currently completing his major in finance, while juggling his roles as President of the Massey University Investment Club and student fund manager. He won the Investment Club stock challenge, where he achieved a return of 44% over a 3-month period. Furthermore, he has received the INFINZ scholarship award for being the top 3rd year finance student in 2020. His role involves contributing research and writing financial reports for Wealth Morning’s readers.


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