Canopy Growth Corp still a tremendous buy despite Bedrocan legal issue, Echelon says

Arbitration proceedings surrounding its wholly owned subsidiary are a “slight negative”, but Echelon Wealth Partners analyst Russell Stanley thinks Canopy Growth Corp. (TSX:WEED) is hugely undervalued.

On Friday, Canopy announced that its wholly-owned subsidiary Bedrocan Canada had commenced arbitration against Bedrocan International BV, claiming the latter had withheld services, designs and supports required by its contract.

“Canopy Growth has established itself as a global leader in cannabis production, research and physician education,” said CEO Bruce Linton. “We will continue our aggressive expansion efforts based on the operational knowhow developed at the Tweed, Tweed Farms and Mettrum facilities. Seeking redress through an arbitration process is necessary to ensure that the Bedrocan Canada asset is maximized for shareholders and operating at maximum efficiency for the good of patients.”

Stanley says this is a negative development, but urges investors to note the reduced importance of Bedrocan to Canopy.

“The need for arbitration proceedings is rarely a positive development,” the analyst says. “We estimate that the Bedrocan facility represents approximately 16% of current annualized capacity (including Tweed, Tweed Farms, Bedrocan and the acquired Mettrum facilities), and given that its products realize lower prices than the rest of the portfolio, its revenue contribution would be even less than that. While the acquisition of Bedrocan Canada could be described as transformative at the time it was completed, the subsequent $350M acquisition of Mettrum, as well as individual facilities at various stages of development/ramp-up in Alberta, Saskatchewan, Quebec and New Brunswick, have significantly diluted the importance of the Bedrocan operations.”

In a research update to clients today, Stanley maintained his “Buy” rating and one-year price target of $14.00 on Canopy Growth Corp., implying a return of 79 per cent at the time of publication.

Stanley thinks Canopy will post Adjusted EBITDA of negative $4.8-million on revenue of $127.9-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $32.0-million on a topline of $278.7-million the following year.