Beacon Securities analyst Vahan Ajamian says the Canada cannabis scene has a new champ -that is, with regards to how cheap it can produce marijuana.
The analyst says The Hydropothecary Corp. (TSXV:THCX) is now leading the way, with a cost of inventory per gram of just $0.89, a number he notes is the lowest cost of production ever reported in Canada.
On December 21, Hydropothecary reported its Q1, 2018 results. The company lost $1.91-million on revenue of $1.10-million, a topline that was down 20 per cent from the same period last year.
“This past quarter was a bellwether for Hydropothecary — a sign of greater things to come,” CEO Sebastien St-Louis said. “Our new products are gaining acceptance in the market. We broke ground on our state-of-the-art 250,000-square-foot greenhouse and announced a new expansion to increase total annual production capacity to 1.3 million square ft. We also upped the calibre of our leadership. Our company is in a strong financial position and these results demonstrate that we are making the right decisions. “Our focus now is on the execution of our two expansion projects and our innovative product strategy in anticipation of the opening of the recreational adult-use cannabis market.”
Ajamian says the market reaction to the quarter caught him off guard.
“We were surprised to see the company’s shares trade down following the release of these industry leading metrics,” the analyst says. “We believe this is likely due to the conversion of debentures at significantly lower levels than the current share price – which may take a few more sessions to churn through. However, with industry leading revenue and costs per gram, plans underway to build 1.3MM sq. ft., a likely near-term catalyst with the SAQ and a valuation well below the company’s peers we see compelling value in Hydropothecary’s shares at current levels.”
In a research update to clients today, Ajamian maintained his “Buy” rating and one-year price target of $8.50 on Hydropothecary, implying a return of 126 per cent at the time of publication.
Ajamian thinks Hydropothecary will generate EBITDA of negative $5.1-million on revenue of $12.0-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $5.9-million on a topline of $35.7-million the following year.