Buy Supreme Pharmaceuticals, Canaccord Genuity says

Supreme Pharmaceuticals’ (Supreme Pharmaceutical Stock Quote, Chart, News: TSXV:FIRE) revenue number for September shows the company is off to a good start, says Canaccord Genuity analyst Matt Bottomley.

This morning, Supreme Pharmaceuticals announced that it had recorded revenue of more than $1.5-million for the month of September.

“Our first sales represent a significant milestone for Supreme and demonstrate our ability to cultivate premium cannabis, navigate the regulatory process and deliver commercial quantities of a high-quality product to our retail partners,” said CEO John Fowler. “Our first sales offer additional validation of our ability to execute on our unique, scalable and focused business model. 7 Acres is establishing a new premium product segment in the Canadian ACMPR [access to cannabis for medical purposes regulations] industry. Our innovative hybrid facility combines the technology of indoor cultivation with the quality of full-spectrum sunlight to produce cannabis targeted at the premium segment of the market. Our passionate team is committed to maintaining our quality standards as we scale our cultivation. For Supreme, SunGrown is not about low cost. SunGrown is a premium product category produced by combining the science of indoor cultivation and the sun to produce beautiful terpene-rich cannabis.”

Bottomley says the metrics still look good for Supreme, and investors should take note.

“Although we estimate that Supreme’s existing built capacity could support wholesale revenues of ~$6 million per year, as the company is currently in the process of doubling the amount of grow rooms at 7ACRES by the end of the year we believe it is on pace to increase its capacity to support this implied run-rate by early CY2018,” the analyst says. “Further, with supply contracts already in place with Aurora Cannabis (one of the largest LPs in the space) and Emerald Health Botanicals, we believe that after receiving its license to sell from Health Canada back in June, Supreme has jumped out of the gate in securing B2B relationships as it aims to become a dominant supplier of high-quality cannabis to wholesale partners. At current levels, the company trades at ~5.3x its funded capacity, still steeply discounted to the peer average of ~8.0x. Although we believe a modest discount to peers is likely warranted, as the company has not implemented an oil/extract strategy, we believe a > 2 turn discount to peers is overdone, and we would remain buyers of Supreme at these levels.”

In a research update to clients today, Bottomley maintained his “Speculative Buy” rating and one-year price target of $2.00 on Supreme Pharmaceuticals, implying a return of 37 per cent at the time of publication.

Bottomley thinks Supreme will generate EBITDA of $3.8-million on revenue of $22.0-million in fiscal 2018. He expects those numbers will improve to EBITDA of $37.5-million on a topline of $131-million the following year.