Supreme Pharmaceuticals is a buy, says M Partners

Investors should take a look at Supreme Pharmaceuticals (Supreme Pharmaceuticals Stock Quote, Chart, News: CNSX:SL) because it is a high margin company in a high growth phase of its business, says M Partners analyst Mason Brown.

In a research report to clients yesterday, Brown initiated coverage of Supreme Pharmaceuticals with a “Buy” rating and a one-year price target of $2.10, implying a return of 17 per cent at the time of publication.

Brown says Supreme, whose business model differs from other marijuana stocks in that its focus is on supplying other industry players with product, has a clear understanding of its opportunity and that will allow it to focus on its core competency, which is producing quality cannabis.

“(A) B2B focus uniquely positions Supreme as a supplier to other LPs and new entrants with a focus on value-add products, retailing, and medical/pharmaceutical applications,” says Brown. “We believe supplying other LPs to help meet demand is just the beginning and that vertical segmentation will result in a number of new companies that use flower (or trim) as their main input. Our industry supply forecast implies the smallest 27 LPs (not top ten or SL) will produce ~20% of supply exiting CY2018. Small scale LPs will demand additional product to compete (and potentially steal market share from the large scale producers) as well as execute on many of the same partnerships and agreements large scale LPs are currently entering. Additionally, and similar to the major factors implicit in our supply curve forecast, opportunities for wholesale will derive from capacity scaling slowly and inefficiently, and insufficient capital necessary to fund expansion plans.”

The analyst says that while wholesale prices are lower than selling direct to the consumer, Supreme’s model is cost efficient because the company does not have to incur the cost of building a sales infrastrucuture.

Brown believes Supreme will post Adjusted EBITDA of negative $5.0-million on revenue of $2.3-million in fiscal 2017. He expects these numbers will improve to EBITDA of negative $4.7-million on a topline of $12.5-million the following year.

Supreme Pharmaceuticals operates a hybrid greenhouse on 16 acres of land in Kincardine, Ontario, which is about 200 kilometres north of Toronto.