Canaccord Genuity analyst Matt Bottomley says investors should take a fresh look at cannabis operators that are listed in Canada but have operations in the United States.
In a research report to clients today, Bottomley addressed the particular market for the aforementioned listings, noting that shares of said companies have been mostly flat since rumours surfaced late in the summer that Clearing and Depository Services Inc. (CDS), Canada’s largest stock clearing/settlement company, was considering prohibiting clearing trades for cannabis companies with US exposure.
But the analyst says a new development, in the form of a document called Staff Notice 51-352 Issuers with US Marijuana-Related Activities, has provided much needed clarity on the matter.
“Although the CSA called for robust disclosures surrounding the risks associated with operating environments where state and federal laws conflict, it also noted that each exchange in Canada should make its own determination on whether to list such issuers,” the analyst points out. “In doing so, the CSA recognized that different exchanges may reach different conclusions on this matter. In our view, the CSA’s commentary represents the removal of a moderate overhang facing Canadian-listed US cannabis companies and provides clarity to investors that regulators expect the risk assessment and determination on whether to allow for the listing of these companies to remain at the discretion of each exchange.
Bottomley thinks American cannabis companies could be set for a re-rating as they are trading at approximately the same valuation multiple as before this development and at a steep discount to Canadian-listed LPs.
The analyst says his Top Pick of the group is iAnthus Capital Holdings, Inc. (CSE:IAN).
“iAnthus is currently trading at a forward EV/EBITDA multiple of ~4.7x, which is over a full turn lower than when the CDS overhang was first introduced and over a 60% discount to Canadian LPs,” the analyst explains. “Although we believe iAnthus should experience a valuation re-rating on the removal of this industry overhang alone, we also believe the company has a number of near-term catalysts that could facilitate a higher valuation, including the anticipated completion of its Mayflower cultivation centre; the closing of its proposed Citiva acquisition and penetration into the NY medical market in early 2018; and, the potential for an increased equity stake in Florida-based GrowHealthy.”
Bottomley currently has a “Speculative Buy” rating and one-year price target of $4.50 on IAnthus, which closed Tuesday at $2.33.