Canopy Growth Corp. will control 20% of the Canadian recreational cannabis market: Canaccord Genuity

He’s not yet ready to recommend the stock, but expansion plans from Canopy Growth Corp (TSX:WEED) have Canaccord Genuity analyst Neil Maruoka upping his estimate on how much of the recreational cannabis market the LP will command.

On Monday, Canopy Growth Corp. announced a joint venture with a company called Les Serres Stephane Bertrand Inc. The pair plan to convert a massive greenhouse in Mirabel, Quebec that was used to grow tomatoes into a large-scale marijuana grow-op. Canopy says the 700,000 sqaure-foot greenhouse will be upgraded and retrofitted for cannabis production by April of next year.

“The joint venture allows us to expand our operational footprint for greenhouse production, and establish a much larger foothold in Quebec,” said canopy 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.”

Maruoka says this is a positive development, but not enough to move the dial on his current “Hold” recoomendation on Canopy.

“We view this to be another incrementally positive expansion into an underrepresented geography,” the analyst says. “Thus far, Canopy has been able to convert its strong presence in both New Brunswick and Newfoundland into modest supply agreements in those provinces. By establishing significant operations in Quebec, we believe Canopy could become a meaningful supplier into this market. While we view Quebec to be a much larger opportunity compared to the Atlantic provinces, we believe it is one with greater competition. Nonetheless, we expect this JV provides Canopy with a strong foothold in this significant market and therefore we increased our estimate for peak penetration into the Canadian recreational market from 17.5% to 20%, the largest market share among all LPs.”

In a research update to clients today, Maruoka maintained his “Hold” rating, but raised his one-year price target on Canopy Growth Corp. from $17.00 to $18.50, implying a return of negative 10.3 per cent at the time of publication.

Maruoka thinks Canopy will generate EBITDA of $12.6-million on revenue of $116.0-million in fiscal 2018. He thinks these numbers will improve to EBITDA of $139.9-million on a topline of $497.0-million the following year.