An acquisition that gives it the ability to expand at a reasonable cost has PI analyst Jason Zandberg feeling bullish about Canopy Growth Corp. (Canopy Growth Corp. Stock Quote, Chart, News: TSX:CGC).
This morning, Canopy Growth announced it had Vert Medical, a Quebec-based ACMPR (access to cannabis for medical purposes regulations) applicant. To pay for the deal, Canopy will assume and immediately pay $500K in debt and issue 58,978 common shares and an additional 294,900 common shares if and when Vert Medical receives a ACMPR license.
“We have spent the last few months assessing the market for potential acquisitions and Vert is one of a select few that stood up to our financial and business evaluation,” said Canopy CEO Bruce Linton. “Expanding the medical cannabis market in Quebec is a key objective for our business and the acquisition of Vert gives us an exceptional platform upon which to meet the needs of the market in Quebec.”
Zandberg says Canopy is adding a lot of potential for not a lot of money.
“The strategy behind the Vert Medical acquisition is to purchase the potential for future capacity expansion at a reasonable cost,” says the analyst. “We estimate that an ACMPR licensed facility could cost $40M or higher whereas an applicant (even in an advanced stage) would sell for substantially less. This acquisition is valued at $2.4M and includes a fully built facility with 90 acres of land for expansion possibilities.”
Zandbeg notes that Vert owns a 7,000 square-foot indoor growing facility and the right to acquire 90 acres of land, but does not have a A Health Canada ACMPR license, something he thinks Canopy can help advance.
In a research update to clients today, Zandberg maintained his “Buy” rating on Canopy Growth, but raised his one-year price target on the stock from $5.00 to $7.00.
Zandberg believes Canopy will lose $0.10 a share on revenue of $37.8-million in fiscal 2017. He expects these numbers will improve to earnings of $0.04 a share on a topline of $76.0-million the following year.