Bedrocan Cannabis is undervalued, says M Partners

Bedrocan Cannabis (TSXV:BED) is a strong and stable early leader in a space with a very high barrier to entry, says M Partners analyst Daniel Pearlstein.

In a research report to clients last week, Pearlstein initiated coverage of Bedrocan with a “Buy” rating and a one-year target price of $1.10, implying a return of 67% at the time of publication.

Pearlstein explains that Bedrocan, which was formed in 2012 and is one of just 13 companies licensed to import and distribute medical marijuana in Canada under the Marijuana for Medical Purposes Regulations, has roots that go back much further. The company is the Canadian licensee of Bedrocan BV, which has been a Dutch government-contracted licensed producer for the past 13 years.

The analyst notes that Bedrocan, which plans to grow the same products at a new Toronto facility that its Dutch parent has been for 13 years, enjoys the benefit of a growing process that is completely standardized and six strains of branded genetically unique marijuana that already have the important ISO:9001 certification.

On October 7th, Bedrocan announced that its new 52,000-square-foot production facility was on track for a year-end inspection by Health Canada. The company said the new facility is “expected to be the most technologically advanced medicinal cannabis growing operation in the world,” and will be capable of producing up to 4000 kilograms of marijuana each year.

Pearlstein says Bedrocan deserves a premium multiple to companies operating in mature regulated industries because it will enjoy high “pharma like” margins with low R&D costs, high growth via surging patient enrollment, very high barriers to entry, as just 13 companies out of more than 1000 applicants to Health Canada have been approved as suppliers, and very strict government regulation. The analyst also notes that Bedrocan also has a strong balance sheet, having recently closed a $11.475 million subscription receipt financing.

The M Partners analyst, who has studied Canada’s medical marijuana market extensively, says it is characterized by an extremely strong potential for growth. He notes that in 2002 there were fewer than 500 individuals authorized to possess medical marijuana. But Health Canada, says Pearlstein, now estimates that there are 40,000 qualified patients in Canada and that the patient population is expected to grow to 450,000 over the next decade, a Compound Annual Growth Rate of 27.4%.

At press time, shares of Bedrocan Cannabis were up 1.5% to $0.66.