ABcann Global’s deal with Cannabis Wheaton makes sense, says PI Financial

A new financing that will fully fund the buildout of a 170,000 square foot facility capable of producing 35,000 kilograms of product per year has PI Financial analyst Jason Zandberg feeling positive about ABcann Global’s (ABcann Global Stock Quote, Chart, News: TSXV:ABCN) prospects.

Yesterday, ABcann announced it had entered into a binding finance agreement with Cannabis Wheaton that will see the latter invest $30-million into the former. In return, Cannabis Wheaton will receive approximately half the proceeds of future wholesale or retail sales completed by ABcann with respect to cannabis produced in the expansion production area.

“This partnership is a great opportunity for both ABcann and Cannabis Wheaton. ABcann significantly enhances its cash position through the equity investment, providing ABcann with the capital to construct up to 180,000 square feet of fully funded capacity,” said ABcann CEO Aaron Keay.

Zandberg says he likes this deal.

“This agreement is more balanced than many streaming deals we have seen,” says the analyst. “The balance is dependent on the allocated costs being in-line with reality (we believe they are). We believe that the costs will total approximately $4/gram (our estimate). If we assume a $7/gram sales price (wholesale/retail average) then CBW would receive $18.75M per annum ($3.00*12,500,000*50%). Cannabis Wheaton will also own about 14% of ABCN (we assumed $30M at $2.25 which equates to 13.3M shares). ABcann has no upfront capital costs for the addition and would likely receive a similar $18.75M cash flow annuity.”

In a research update to clients today, Zandberg maintained his “Buy” rating, but raised his one-year price target on ABCN from $2.25 to $2.40. Shares of the company closed Tuesday up 4.2 per cent to $1.00.

Zandberg thinks ABCN will post an Adjusted EBITDA loss of $5.29-million in fiscal 2017. He expects these numbers will improve to positive EBITDA of $8.35-million on a topline of $30.2-million the following year.

Disclosure: ABcann Global is an annual sponsor of Cantech Letter and Cantech Letter editor Nick Waddell purchased shares of the company in the open market, which he still owns.

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