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How Has Ecofibre Been Tracking Half A Year After Listing?

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Ecofibre (ASX: EOF) is a recently listed ASX hemp company, working to fast track the development of its hemp-based textiles business. The company has largely traded sideways over the past 6 months, on the back of few material positive news updates and a slight deterioration of investor sentiment towards the cannabinoids space. With the business trading on well over 20x FY19 revenue, the valuation is of concern to some investors. This is because many of the products could attract competition from larger cannabis players, which would reduce earnings quality and threaten the overall sustainability of the business.

Ecofibre - Report

Hemp is a strain of of marijuana but with less than one percent of the psychoactive ingredient that causes the “high” associated with the recreational drug. While the end uses of the two plants are very different, investors who are interested in the recreational or medicinal marijuana space are often drawn to hemp businesses because of the biological link between the two plants.

One trend that is driving growth in both typical marijuana and hemp stocks is legalisation. The US government removed the ban on hemp late last year, allowing products to be sold freely across the United States. The previous ban was based on the plant’s link to marijuana but did not take the much lower THC levels into account. Since it is almost impossible to get the psychoactive effects associated with recreational marijuana products using hemp products, it is unlikely there will ever be a reason for the product to be recriminalized. Australia removed the ban on hemp in late 2017, boosting Ecofibre’s local operations.

Ecofibre’s main business is Amanda foods, which makes food for consumption by both humans and pets. Hemp can also be used in industrial applications, which is why Ecofibre is working to rapidly commercialise its textile products.

Investors who stumbled across Ecofibre but are more interested in the medicinal and recreational cannabis space still have options on the ASX. Australia’s largest cannabis company is a small cap by the name of Elixinol (ASX: EXL), a company which covers both traditional marijuana and hemp. The stock is worth half a billion dollars, and burns $19.3m a quarter in cash, a figure which has increased from the previous period. Unlike Ecofibre, it does not have as clear a route to profitability and is likely to suffer in a market downturn as a pre-revenue business, but this is common when investing in new industries.

If you are willing to look internationally however, the more mature cannabis markets in the US and Canada offer more established companies to invest in. Canopy Growth is the largest cannabis stock by market cap, trades on the NYSE and is worth $13.5bn. The business is a medical market leader in spectrum therapeutics and has operations across 12 countries around the world. The company operates across both medical therapies and consumer products that are designed for recreational use. Recreational marijuana has significant upside because there are so few jurisdictions where it has been legalised. Mass legalisation can help the company grow more rapidly than businesses that only sell medicinal marijuana, especially given its existing dominance in the recreational products space and brand recognition.




This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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