Clarus Securities analyst Noel Atkinson thinks the “granddaddy” of all Canadian Licensed Producers, CanniMed Therapeutics (TSX:CMED), is a name investors should currently be looking at.
In a research report to clients today, Atkinson initiated coverage of CanniMed with a “Buy” rating and a one-year price target of $16.25, implying a return of 48.3 per cent at the time of publication.
CanniMed, whose roots go back to the establishment as Prairie Plant Systems in 1988 in Saskatoon, was in the year 2000 awarded a five year contract by Health Canada to develop and cultivate marijuana strains. That contract actually lasted until 2014, a year after it became the first LP under the current regime. The company went public on the TSX late last year with a $69-million raise.
Atkinson thinks two opposing thoughts spell opportunity for CanniMed: first, he believes investors “dramatically underestimate” the market potential of the medical cannabis sector. Second, he thinks that marijuana is a “notoriously difficult” crop to grow at scale. The result of these two assessments, he says, is that larger LPs will end grabbing market share at the expense of smaller, weaker competitors. He thinks CanniMed, with a 100-acre site in Saskatoon that includes 97,000 square feet of production space, will be among the former.
“We expect CanniMed to be one of the long-term winners in the medical cannabis production sector,” Atkinson says. “It has the most production experience of any LP –the Company was the exclusive producer of medical cannabis for Health Canada from 2000 to 2014, and the first Licensed Producer under the current MMPR/ACMPR medical cannabis program. CanniMed also has scale – it has the second-largest existing production capacity of any LP and has quickly become one of the largest producers of high-margin cannabis oil. At a time when several LPs have struggled with contamination issues, CanniMed’s production has been GMP-certified for pharmaceutical-grade hygiene and quality control since 2006.”
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Atkinson thinks CanniMed will post Adjusted EBITDA of $1.2-million on revenue of $18.9-million in fiscal 2017. He expects these numbers will improve to EBITDA of $14.7-million on a topline of $45.1-million the following year.
Atkinson says there exists the potential for CanniMed to go far beyond its current production of 7000 kilograms per year and planned expansion to 12,000 kilograms per year.
“We believe CanniMed is just scratching the surface of the Canadian and international medical cannabis markets at that size, and we believe it is possible for the Company to expand to as much as 40,000 kg/year by CY2020 if it takes a more aggressive stance on facility expansion and leverages its production knowledge to capture more market share,” he argues.