During its AGM, Synbiotic announced a strategic realignment, changing the investment case to the positive. Synbiotic is diverting from buying leading CBD brands and is now focusing on building the needed infrastructure to capitalize on the German medical cannabis market and the recreational potential.

Within the medical cannabis market, Synbiotic is already gaining traction thanks to its recently launched brand HempamedRX, which offers a variety of products such as flowers, dronabinol and full-spectrum extracts to pharmacies. The medical cannabis market in Germany is seen to grow at a 30% CAGR, reaching a volume of around € 850m by 2025e. That, coupled with upcoming product innovations on the back of extensive R&D and a strong brand, should support strong sales growth of Synbiotic’s medical cannabis segment; from € 0.4m in 2022e to € 21m by 2026e.

Recreational cannabis with massive potential. Following the expected legalization of cannabis by Q1 2024e, the recreational cannabis market is expected to reach some € 3bn within four years. Thanks to its 50.1% stake in Hanf Farm – the largest organic hemp farm in Europe with 1k hectares of farmland and some 20 years of production and processing expertise and coupled with additional investments into the necessary infrastructure during the next few years (2023-25e: € 16m), Synbiotic is seen to capture a 7% market share by 2026e, implying some € 84m sales.

Further, Synbiotic was able to secure Bruce Linton, the founder and former Chairman and CEO of Canopy Growth (first North American supplier to the German medical cannabis market), as Chairman of its new Advisory Board. Having his know-how on board should strongly support Synbiotic’s efforts to expandits medical cannabis business and enter the recreational market following the legalization.

The Wellness & Food segment, which should account for roughly 95% of FY 2022e sales, will remain a non-focus part of the group but is seen to decrease in significance. Instead of inorganically broadening the product offering (part of the old strategy), management is now focusing improving margins (break- even in 2023e) and reaching low-double digit annual sales growth going forward (eNuW: 10% p.a.).

In order to be able to better reflect the growth prospects from recreational cannabis during the mid- to long-term, we change the valuation method from a peer group analysis to a DCF model (13% terminal margin, 2.5% terminal growth and 10.5% WACC). BUY with a new PT of € 44 (old: € 75).