Yahoo Finance Cannabis 'value play' stock could become a top five Canadian producer: GMP Securities
Investors who missed out on the dramatic run-up in cannabis stocks might want to take a look at Zenabis Global Inc. (ZENA.TO)
The small Surrey, B.C.-based licensed producer has the potential to rub shoulders with Canada’s biggest cannabis players, according to GMP Securities analyst Justin Keywood.
“ZENA is a Canadian LP that has an opportunity to become a top five supplier, but valuation is well below most peers,” Keywood wrote in a note to clients on Thursday. “With initiate on ZENA with a BUY rating and a $3.25 per cent target, implying almost 100 per cent return.”
Shares climbed 2.31 per cent to $1.77 at 12:15 p.m. ET on Friday.
“ZENA currently trades at 7x our 2020 EBITDA forecasts, which is below all senior LPs and most comparable junior LPs. For our $3.25 target, we assign a 12x EBITDA multiple for ZENA’s propagation business and 15x multiple for cannabis,” Keywood wrote.
“The 15x multiple for cannabis is below a broad group of peers at 20x and much lower than some of the senior LPs.”
Zenabis Global was formed in January through the combination of privately-held licensed producer SunPharm Investments Ltd. and Bevo Agro Inc., a provider of propagated vegetables and flowers. Its predecessor, Zenabis Ltd., was a licensed medical cannabis producer with operations in British Columbia and New Brunswick.
The new Zenabis has had a busy 2019, up-listing from the venture exchange to the TSX in late May, securing a supply agreement with Shoppers Drug Mart in February, and inking supply arrangements with Alberta, Manitoba, Quebec and Prince Edward Island. The company’s supplier network currently extends to eight provinces and one territory.
Keywood struck an upbeat tone on the quality of Zenabis Global’s production facilities, and said meetings with several of the companies partners, including government contacts, were “unanimously positive.”
He also expressed approval of chief executive Andrew Grieve’s decision to link his compensation to the company’s financial performance.
Zenabis currently has licensed production capacity of 23,100 kilograms, and has submitted amendments to increase its run-rate to 32,900 kilograms in the third quarter of this year. Expansion plans anticipate a total run-rate increasing to 131,200 kilograms going into 2020, and include an option to expand capacity to 478,800 kilograms.
For comparison, Aurora Cannabis Inc. (ACB.TO) currently has a total funded capacity of more than 500,000 kilograms per year.
Keywood believes Zenabis Global shares are oversold. Shares have fallen more than 70 per cent year-to-date.
“Although a short-term financing overhang exists, we see the stock as being oversold for the current capital structure with a clear path to our $3.25 target. Exceptional partner feedback also lowers the risk to our investment thesis, and we see a compelling entry point at about seven times EBITDA,” he wrote.
Keywood expects Zenabis to generate fiscal 2019 revenue and EBITDA of $100.1 million and negative $9.4 million, respectively. He is calling for the company to book fiscal 2020 revenue and EBITDA of $261.6 million and $51.5 million, respectively.
“A unique investment opportunity exists for a value play in cannabis with ZENA,” Keywood wrote.
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