An underwhelming quarter isn’t changing GMP Securities analyst Martin Landry’s view that Medreleaf (TSX:LEAF) is a leader in its space.
On Monday, Medreleaf reported its Q2, 2017 results. The company lost $2.12-million on revenue of $9.8-million, a topline that was down nine per cent from the same period last year.
“In the second quarter, we increased average selling price and lowered cash costs per gram sold, and this drove improvement from the first quarter to adjusted product contribution margin per gram,” said CEO Neil Closner. “This margin provides us with greater flexibility in our business model to adapt to changes and operate profitably as the industry evolves, and we are ideally positioned for growth now that the full impact of the Veterans Affairs Policy (VAC) changes on capping price and volume are behind us.”
Landry notes that Medreleaf’s second quarter fell below his and consensus expectations, but says he expects near term catalysts such as the onboarding of the company’s Bradford facility, further penetration in the extract market and upcoming European sales are all positives investors can look forward to. And the analyst believes a much larger catalyst could be on the horizon.
“LEAF is well positioned as a long-term industry leader and potential partner for big pharma, alcohol or tobacco, with robust brand recognition, product quality and funded capacity expansion,” Landry says. “Hence, we believe the recent share price performance is merited. While our forecasts are reduced to better reflect Bradford’s ramp-up, they do not include any upside from future capital deployment. Hence, to reflect the above and overall recent multiple expansion in the sector, we are reducing our discount rate. Our target is based on a DCF using: 1) discount rate of 8% (9% previously), 2) avg. market share of 7% and an avg. EBITDA margin of 34% (32% previously), and 3) a terminal growth of 3%.”
In a research update to clients today, Landry maintained his “Buy” rating on Medreleaf, but raised his one-year price target on the stock from $14.00 to $20.00, implying a return of 9.6 per cent at the time of publication.
Landry thinks Medreleaf will generate EBITDA of $6.8-million on revenue of $46.2-million in fiscal 2018. He expects those numbers will improve to EBITDA of $52.0-million on a topline of $149.2-million the following year.