Canopy Growth Corp can expand geographic footprint with rTrees acquisition, says Canaccord

The acquisition of rTrees may help expand Canopy Growth Corp’s (TSX:WEED) geographic footprint outside of Ontario, says Canaccord Genuity analyst Neil Maruoka.

Yesterday, Canopy announced it would acquire Yorkton, Saskatchewan-based late-stage access to cannabis for medical purposes regulations applicant rTrees Producers Ltd. The company announced that the resultant project, which will soon boast a 90,000 square foot indoor growing facility, will be dubbed “Tweed Grasslands”.

Canopy said it would issue 698,901 shares to acquire rTrees, plus another $3.5-million held in escrow for performance milestones, making the deal worth a minimum of $7.4-million and a maximum of more than $37.2-million.

“Finding the right opportunity to expand our footprint to Western Canada has been an important priority for our team,” said Canopy CEO Bruce Linton. “We are proud to bring the Tweed reputation for high-quality cannabis and engaging customer care to Western Canada, partnering with some of the early pioneers in Canada’s legal medical cannabis system.”

Maruoka says the deal creates a couple clear advantages for Canopy.

“We view this as a positive strategic move, as it expands Canopy’s geographic footprint out of Ontario and into the lower-cost province of Saskatchewan,” he says. “We believe this is important for Canopy, potentially increasing leverage for distribution in Western Canada, while also establishing a reduced cost base for the company’s higher-quality indoor grow.

But despite this development, the Canaccord Genuity analyst still thinks Canopy is looking toppy. Yesterday, in a research update to clients he maintained his “Hold” rating and one-year price target of $12.00 on Canopy Growth Corp., implying a return 15 per cent at the time of publication. Maruoka explained his reasoning.

“Although we believe Canopy may well emerge as the leader of the Canadian cannabis industry, the stock currently trades at 12.2x its funded capacity, at the high end of peers averaging 9.1x,” he points out. “Although we believe its dominant market position justifies a premium, our sum-of-the-parts valuation further supports current trading levels and we are therefore maintaining our HOLD recommendation.”

Maruoka thinks Canopy will generate EBITDA of negative $25.2-million on revenue of $40-million in fiscal 2017. He expects these numbers will improve to positive EBITDA of $38.2-million on a topline of $131-million the following year.