After pausing to reflect on the implications of the mega-acquisition of peer Mettrum Health, M Partners analyst Mason Brown has resumed coverage of Canopy Growth Corp. (TSX:CGC) with a higher price target.
In a research update to clients today, Brown maintained his “Buy” rating on Canopy Growth, but raised his one-year price target to $13.50, implying a return of 35 per cent at the time of publication.
On November 30 (or December 1, depending upon your time zone) Canopy announced it would acquire peer Mettrum in a deal valued at approximately (C) $430 million.
“From day one, Canopy Growth has viewed production capacity, brand diversity, and highly-skilled management as the foundational aspects of our business,” said Canopy CEO Bruce Linton. “Mettrum has established a line of cannabis products that work well in a medical context and will transition naturally into a natural and healthy lifestyle market. Their substantial production facilities will add to our growing production platform as we expand to meet the needs of patients, and their experienced personnel will help Canopy Growth drive our vision forward to the next level. Both Canopy Growth and Mettrum have proven themselves with Canadian patients; and together we intend to make our industry-leading product and service offering even stronger, while developing our common hemp objectives.”
Brown says that while the price Canopy is paying for Mettrum may appear steep, he views the transaction positively because Canopy is clearly taking a longer view of the industry. He believes investors need to adopt the same mindset.
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“While the near-term implied acquisition multiple appears steep, Canopy is taking action with a much longer investment horizon in mind and we believe investors need to look at this industry with a similar view,” says the analyst. “While the one year forward multiple appears steep (38.7x EV/CY2017E cons. EBITDA) at first glance, we remind investors that one-, two-, and even three-year forward multiples are unlikely to reflect the growth potential of the Canadian LPs in Canada and more importantly, internationally. Canada, which we estimate could be a $7.1B market, is only the tip of the iceberg in terms of the global cannabis legalization movement. The global market is estimated at $150B to $200B and we note that these estimates may materially discount the medical and nutraceutical opportunity for cannabis. Cannabis has achieved little penetration on the medical front due to the shortage of research, which has only picked up steam in the past few years. On page 4 we summarize the international cannabis tide effect and why we believe the Canadian LPs could trade at growth multiples for years to come.”
Brown thinks Canopy will generate Adjusted EBITDA of negative $3.40-million on revenue of $68.2-million in fiscal 2017. He expects these numbers will improve to positive EBITDA of $12.8-million on a topline of $141.8-million the following year.
Below: Bruce Linton, TEDxKanata “In Defence of Barriers”