Canopy Growth Corp. gets price target raise to $24.00 at GMP

Expansion plans at Canopy Growth Corp (TSX:WEED) have GMP Securities analyst Martin Landry feeling bullish about the company’s stock.

This morning, Canopy announced it will convert a 700,000-square-foot greenhouse in Quebec into a marijuana growing facility.

“The joint venture allows us to expand our operational footprint for greenhouse production, and establish a much larger foothold in Quebec,” said CEO Bruce Linton. “The fusion of Canopy’s cannabis expertise with the greenhouse expertise of Les Serres Stephane Bertrand is fantastic news for our customers and investors.”

Landry says this development sent him back to the drawing board on his industry assumptions

“Today’s announcement fills a gap in the regional production profile of the company,” the analyst says. “Canopy is expected to have by far the largest inventory available at the opening of the recreational market enabling the company to be a favored supplier to most provinces. Hence, to reflect today’s announcement, we have increased our Canadian market share assumption at the onset of the opening to 30% up from 25% previously. Over our 10-year DCF time horizon, we expect that Canopy’s market share will decline to 22% as more competitors enter the market.”

In a research update to clients today, Landry maintained his “Buy” rating, but raised his one-year price target on Canopy Growth Corp. from $22.00 to $24.00, implying a return of 19.1 per cent at the time of publication.

Landry thinks Canopy will generate Adjusted EBITDA of negative $17.5-million on revenue of $74.7-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $81.5-million on a topline of $375.6-million the following year.

Landry explained the reasoning behind his new target.

“Canopy continues to announce sizeable expansion plans with domestic plans expected to generate production capacity in excess of 200 tons by FY2020,” the analyst notes. “This capacity could support revenues of up to $1b assuming an average wholesale price of $5 per gram (dried and extracts). This compares favorably to our DCF estimate of $650m in revenues for FY2020. Canopy has announced plans to setup production in seven provinces, making it the most geographically diversified LP. While execution risks still abound given multiple production sites and rapid pace of growth, we view Canopy as the best positioned LP to make the transition from the medical to the recreational market. Our target is based on a DCF using: 1) a discount rate of 8%, 2) average market share of 24% (21% previously), and EBITDA margin of 29%, and (3) terminal growth of 3%.”