Capacity expansion at Canopy Growth gets thumbs up at Echelon Wealth

He anticipated it would happen, but Echelon Wealth Partners analyst Russell Stanley says recently announced capacity expansion at Canopy Growth Corp. (TSX:WEED) is a positive nonetheless.

This morning, Canopy subsidiary Tweed announced that it had increased the flowering space at its flagship Smith Falls, Ontario facility by 50 per cent. Tweed also announced that it has received licensing approval for a number of additional rooms it says it has targeted additional expansion, including several new fulfilment rooms it says will triple Tweed’s order fulfilment capacity.

“This phase of construction evolves our design and comes in on time and on budget,” said CEO Bruce Linton. “We’ve found operational efficiencies that we believe make our existing and newly licensed rooms materially more efficient than they were two years ago. This means more products to market and more variety for customers. While more growing space is imperative to our ability to meet demand, we also must be able to scale with increasingly more sophisticated processes and facilities to accommodate rapidly accelerating order demand today and into the future.

Stanley says that while he had modeled such an expansion when he launched coverage of Canopy Growth Corp. in late February, it is a positive that the company is on schedule with it, as he notes that it is management’s stated goal to be the dominant supplier of legal cannabis. He says we will begin to see the effect of this development by this summer.

“With the additional grow rooms approved for use, we expect them to begin contributing to revenue in July (Q218, given WEED’s March 31 FYE),” says the analyst. “Our model assumes that another six grow rooms are approved by June, and begin contributing to revenue in October (Q318). These rooms should add a further 33% to production capacity, thus doubling the facility’s exit capacity from 4,500 kg in Q118 to 9,000 kg in Q318. This represents annualized potential Tweed revenue of $72M at full capacity, assuming an average price of $8/gram.”

In a research update to clients today, Stanley maintained his “Speculative Buy” rating and one-year price target of $14.00 on Canopy Growth Corp., implying a return of 44 per cent at the time of publication.

Stanley thinks Canopy will deliver Adjusted EBITDA of negative $14.2-million on revenue of $40.4-million in fiscal 2017. He expects these numbers will improve to an EBITDA loss of $6.0-million on a topline of $130.4-million the following year.