New Brunswick news doesn’t move the needle for Canopy Growth, says Canaccord Genuity

A supply deal with the province of New Brunswick isn’t changing Canaccord Genuity analyst Neil Maruoka’s mind about Canopy Growth Corp. (Canopy Growth Stock Quote, Chart, News: TSX:WEED), which he feels is fully valued.

This morning, Canopy Growth announced it had signed a two-year supply agreement with New Brunswick that will see Canopy supply four million grams of cannabis and cannabis derivative products in the first year.

“New Brunswick has led the country in its efforts to attract cannabis jobs and investment and Canopy Growth is proud to be utilizing local trades and to hire in New Brunswick for the site we are establishing in Fredericton,” said Mark Zekulin, president, Canopy Growth. “Today we take the next step towards the future of cannabis in New Brunswick with a truly historic MOU. We are excited to bring high-quality brands like Tweed, Leafs By Snoop, DNA Genetics, as well as a number of the best independent craft grow cannabis producers across Canada to the people of New Brunswick through this arrangement.”

Maruoka says he is not surprised by this development, but says one figure seems a tad optmistic.

“Following on last week’s announcement from the Ontario government, New Brunswick is also preparing for a targeted July 1 rollout of recreational cannabis sales in Canada; similar to Ontario, it appears that New Brunswick is planning to distribute cannabis through a newly formed Crown corporation. The two year supply agreement includes 4,000 kg of cannabis to be supplied in the first year; although the company indicates this could represent a retail price of $10 per gram, we believe the actual price to the LP could be substantially lower as the recreational market shifts to a wholesaler distribution model. We have made no changes to our forecasts following this announcement, as it is in line with our expectations for the rapid ramp of cannabis sales beginning in the second half of next year.”

In a research update to clients today, Maruoka maintained his “Hold” rating and one-year price target of $9.50 on Canopy Growth Corp., implying a return of negative 5.6 per cent at the time of publication. The analyst explained his reasoning.

“Although we believe Canopy may well emerge as the leader of the Canadian cannabis industry (again supported by this supply MOU), the company currently trades at 11.0x its funded capacity, at the high end of peers averaging 6.7x. Although its dominant market position may justify a premium, we believe our target price of C$9.50 continues to support current trading levels and we therefore maintain our HOLD recommendation.”

Maruoka thinks Canopy Growth Corp. will generate EBITDA of $15.7-million on revenue of $120-million in fiscal 2018. He thinks those numbers will improve to EBITDA of $140.6-million on a topline of $497-million the following year.