With multiple near-term catalysts on the horizon, PI Financial thinks investors should be positioned in quality licensed medical marijuana producers.
Yesterday, PI analyst Jason Zandberg initiated coverage of four stocks in the space, Aphria (TSXV:APH), Canopy Growth Corp. (TSXV:CGC), Mettrum Health (TSXV:MT) and OrganiGram Holdings (TSXV:OGI) with “Buy” ratings. The analyst rates the risk profile of these stocks as “Speculative”.
Zandberg notes that despite an environment that is rapidly becoming more favourable to licensed producers, to date only about five-thousand doctors have recommended marijuana to their patients, a figure that represents just 7 per cent of all practicing doctors in the country. The analyst points out that under MMPR regulations, there have been just 34 licenses awarded to grow and/or sell marijuana and 22 licenses to sell cannabis oil.
Zandberg thinks the next few years will be ones of strong growth for the Canadian marijuana market, with demand from both recreational and medicinal users. He thinks that in 2019, which he estimates to be the first year after recreational use is permitted, the market will be worth $4.6-billion. He expects this will grow 10 per cent annually, reaching $7.4-billion within the first five years, evenly split between medicinal and recreational users.
The analyst says that he has no insight into what the recreational distribution model will be, but thinks it will be a “jump ball” for marketplace domination. “A strong brand and strong product will prove to be invaluable,” says Zandberg, who adds that a low cost of production will be “critical” for growers to survive in the space.
Zandberg thinks Aphria (TSXV:APH), which was first granted a MMPR license in March, 2014, is a strong candidate to emerge as a leader because it has demonstrated that it is able to produce marijuana at a cost that is lower than anyone else to date. He notes that its most recent quarter of production revealed a cost per gram of $2.08, comparing favourably to the $3.34 to $14.68 it takes other producers. He says this low cost of production positions Aphria well for wholesale and retail opportunities.
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“Because of Aphria’s low cost of production it is able to profitably sell dried bud to other licensed producers,” says Zandberg. “We feel this is important as we believe the market will eventually go to a traditional wholesale / retail model (possibly with pharmacy’s distributing medical product and liquor control boards distributing recreational product). The company does not break out the split between wholesale and direct sales but, based on patient count growth versus total grams sold, we estimate it is likely 25% wholesale and 75% direct sales.”
Zandberg has initiiated coverage of Aphria with a “Buy” rating and a one-year price target of $3.00.
The second company Zandberg thinks is positioned well is Canopy Growth Corp. (TSXV:CGC), formerly known as Tweed Marijuana. The largest licensed producer in the country, Zanberg believes this is among the very strongest of brands, and is well-suited to succeed in the recreational market. The analyst thinks the company’s 350,000 square-foot greenhouse facility has the potential for low-cost production.
Zandberg thinks recent investments from Canopy will bear fruit in the future, even if they don’t look so good on the balance sheet now.
“During the fourth quarter Canopy’s cost of production soared compared to the sale of product.,” he says. “This was a direct result of the company’s phenotyping process where the production is focused on selecting new and improved strains rather than growing product for sale. We believe that this investment will pay dividends in a recreational market where the quality of experience will matter more than in the current medical marketplace. ”
Zandberg has a “Buy” rating and one-year price target of $4.25 on Canopy Growth Corp.
Zandberg’s third pick is Mettrum Health Corp. (TSXV:MT).
The company, which has facilities near the Greater Toronto Area, has three licenses to sell dried marijuana and recently secured a license to sell cannabis oil extracts.
Zandberg says Mettrum has already shown success at outreach, with the fastest client onboarding of any licensed producer.
“Mettrum has been very successful at working with medical professionals to build an impressive database of registered patients,” he says. “In June 2016, the company announced it had 12,099 patients register – a 300% increase in the last 12 months. The key to success is, of course, translating those patient numbers into sales and during FY16 (ending March) MT has an average consumption of 0.51 grams per patient per day (below Health Canada’s industry stats which suggest 0.71 grams per patient per day). ”
Zandberg has a “Buy” rating and a one-year price target of $3.50 on Mettrum Health Corp.
The fourth and final company on Zandberg’s list is Moncton, New Brunswick-based OrganiGram Holdings Inc. (TSXV:OGI).
Zandberg says OrganiGram is among the country’s lowest cost producers, in part because of low power and labour costs in New Brunswick. The company is also a certified organic operator, which he thinks will appeal to certain parts of the market.
The analyst says the organic angle should play well in the retail market.
“We believe an organic marijuana product will translate into strong demand under a recreational model. Whatever the retail distribution model looks like, we believe that retailers will want an organic choice for its customers. Currently, there are only two organic growers of medical
marijuana in Canada – OrganiGram and Whistler Medical Marijuana (private).”
Zandberg has a “Buy” rating and a one-year price target of $2.25 on OrganiGram Holdings.