Better things are coming for Emblem Corp but take a pass right now: GMP

Following the company’s third quarter results, GMP Securities analyst Martin Landry is staying on the fence with Emblem Corp (TSXV:EMC), but says things should brighten considerably in 2019.

On Tuesday, Emblem Corp reported its Q3, 2017 results. The company earned $49,879 on revenue of $592,943, a topline that was up 10 per cent over the same period a year earlier.

“I am very pleased with our team’s efforts in completing and commissioning the additional grow rooms which result in increased production capacity pushing towards 2,000 kilograms as we enter 2018,” chairman Harvey Shapiro said. “Subsequent to quarter-end, Emblem received its long awaited sales licence for oil products, which combined with our increased production capacity is expected to significantly improve our revenue and margin profile as we enter 2018. With some of the challenges and delays behind us, our management team and the board of directors are encouraged with the prospects for great positive developments in 2018 as we execute on our growth plan.”

In a research update to clients today, Landry maintained his “Hold” rating but cut his one-year price target on Emblem Corp from $2.00 to $1.75, implying a return of negative 2.8 per cent at the time of publication.

Landry, who notes that Emblem’s numbers came in below his and consensus expectations, today explained why he thinks the near-term outlook for Emblem is “muted”.

“Our neutral stance on EMC is based on: 1) slow progression thus far with recurring delays impacting our confidence, 2) limited near-term capacity expected to remain capped at ~2,000kg until Q1/19, and 3) elevated valuation at ~9x CY19 EV/EBITDA, a ~40% premium to junior LPs. Our target is based on a DCF using: 1) a 12% discount rate, 2) average market share of 3%, 3) average EBITDA margin of 28%, and 4) 3% terminal growth.”

The GMP analyst says he sees a brighter outlook for 2019, when he sees improving gross margins supported by new product development in the medical channel.

Landry thinks Emblem Corp will generate EBITDA of negative $8.6-million on revenue of $2.7-million in fiscal 2017. He expects those numbers will improve to EBITDA of negative $3.8-million on a topline of $11.3-million the following year.

In fiscal 2019, the analyst expects Emblem will break out with EBITDA of $22.1-million on revenue of $60.3-million.