CanniMed Therapeutics has “considerable upside potential”, Echelon Wealth says

With a swirl of activity around the company, Echelon Wealth Partners analyst Russell Stanley has raised his target price on CanniMed Therapeutics (CanniMed Therapeutics Stock Quote, Chart, News: TSX:CMED).

Last Friday, CanniMed announced its intention to acquire Newstrike Resources (Newstrike Resources Stock Quote, Chart, News: TSXV:HIP), the parent company of Up Cannabis Inc., which is perhaps best known for having members of the Tragically Hip as shareholders.

“This is a transformational strategic acquisition for our company, which will position CanniMed and Up Cannabis together as premium players in the emerging recreational cannabis marketplace, while equally staying true to our mandate to provide the best treatment and care to medical patients,” said CanniMed CEO Brent Zettl. “Together, we recognize the importance of brand loyalty and will continue to build products, programs and resources to showcase our leadership in the cannabis arena.”

Stanley has a positive take on the deal.

“We view the transaction as a strategic fit, and it is consistent with management’s previously stated plan to enter the recreational market via an acquisition of a distinct, premium producer,” the analyst says. “Based on HIP’s current share price, this represents approximately $15.85/gram of HIP’s funded capacity, a 26% discount to the peer group average of $21.52/gram, so the purchase price looks very attractive.”

Stanley notes that looming in the background of this entire deal is the fact that Aurora Cannabis has gone hostile with its bid for CanniMed, a development he says casts a tangle around the company’s activities.

“ACB intends to offer approximately 4.5 shares of ACB per share of CMED, with a price cap of $24.00/shr of CMED. ACB noted that it has obtained irrevocable lock-up agreements from CMED shareholders representing 38% of the outstanding stock,” the analyst explains. “The agreements require that these shareholders also vote against any proposed action by the CMED board, so obtaining CMED shareholder approval for the HIP acquisition may not be a slam dunk. As of writing, the share exchange ratio implies a value for CMED of $25.71/shr, so the price cap of $24.00/shr would apply if executed today. We also note that CMED is still trading well short of the price cap level, suggesting uncertainty as to whether an ACB takeover will succeed, or what the value of that ACB stock would be once it is issued (or both).”

In a research update to clients Monday, Stanley maintained his “Speculative Buy” rating, but raised his one-year price target on CanniMed from $14.00 to $22.00, implying a return of 13 per cent at the time of publication.

The analyst explains that the reason for the target raise is to bring the company in-line with the multiple expansion happening with its peer ground. While he notes that the 13 per cent rise he models is “modest”, Stanley says he sees “considerable upside potential” for capacity expansion and product/revenue mix improvement.

Stanley thinks CanniMed will generate Adjusted EBITDA of negative $1.9-million on revenue of $16.7-million in fiscal 2017. He expects those numbers will improve to EBITDA of $5.8-million on a topline of $42.1-million the following year.

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