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Is the Kanabo share price about to explode?

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Powder of Cannabis (Drugs), Analysis of Cannabis in laboratory.
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The Kanabo (LSE:KNB) share price hasn’t been a stellar performer since its IPO earlier this year. After reaching as high as 51p, the stock has since been on a downward trajectory to around 18p today. But last week, it saw a slight bump following an encouraging announcement.

Materia Malta, a separate company, has received a licence to produce cannabis for medicinal and research purposes from regulators. What does this have to do with Kanabo? And why is it such a promising milestone? Let me explain.

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New growth potential for Kanabo’s share price

Materia Malta’s new licence was the final step in becoming a fully-fledged medical cannabis producer. Thanks to the firm’s existing European infrastructure and pharmacy network, it now has an annual capacity of around 6,000kg. That’s worth roughly €35m.

Materia still needs to receive licences for its individual products. However, its first one has already been registered in Germany ahead of the first shipment. Needless to say, this is fantastic news for the business. So how does it link back to Kanabo and its share price?

In July, Kanabo and Materia signed a non-binding merger agreement. Under the proposed deal, Kanabo would acquire Materia’s entire European operations. And with this new licence, the firm’s product portfolio could expand considerably. And the acquisition of Materia’s distribution network across Europe grants Kanabo instant access to the entire market.

That’s quite exciting, in my opinion. And it could lead to some explosive gains in the Kanabo share price over the long term. However, there are some risks to consider.

The Kanabo share price has its risks

The road ahead

Excluding the first product shipment to the UK last July, Kanabo doesn’t have any other significant sources of income. In other words, it remains largely pre-revenue. That’s why I find the prospect of gaining a €35m product pipeline through the Materia merger so promising. And yet the Kanabo share price had a somewhat muted response to the announcement. Why?

There seems to be a high level of uncertainty from investors surrounding the proposed deal with Materia. While the two companies have signed an initial agreement, the contract, in its current form, is non-binding. It means there’s no guarantee that this merger will actually happen.

The two management teams are currently in active discussions to find a mutually beneficial deal. But even if they find one that shareholders are also happy with, regulators may decide to put the brakes on the whole thing.

The bottom line

Kanabo continues to look like a young business with ever-increasing promise, in my eyes. However, nothing has really changed on an operational level since I last looked at this company. So, my opinion remains the same.

I still believe that it’s too early to add Kanabo to my portfolio, even with its share price potential. Once the business can establish a solid revenue stream either through the Materia merger or through alternative means, I’ll take another look.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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