MedReleaf deal with Shoppers Drug Mart proves there will be a place for premium pot, Clarus says

A multi-year contract with Shoppers Drug Mart is proof that premium products such as those developed by MedReleaf (MedReleaf Stock Quote, Chart, News: TSX:LEAF) will have a place in the Canadian pot landscape, Clarus Securities analyst Noel Atkinson says.

On Thursday, MedReleaf announced it had entered into an agreement to supply medical cannabis to Shoppers Drug Mart.

“From inception, Medreleaf has been focused on setting the standard for patient care in our industry and producing consistent, high-quality medicine,” said CEO Neil Closner. “With this agreement, we look forward to making our award-winning strains available as the trusted provider of premium cannabis-based pharmaceutical products to the largest pharmacy retailer in Canada.”

Atkinson says he regards MedReleaf as one of a small group of what he calls “advanced producers”. This elite group, he says, have achieved high yields with low production costs without any issues. The analyst says he expects these companies will command a dominant share of the overall market. He said this deal will give the company yet another leg up.

“The supply agreement should support our revenue estimates – which already incorporate a sizable amount of wholesale shipments for medical and rec cannabis starting in mid-2018 – and boost MedReleaf’s efforts in both the rec and medical cannabis segments,” Atkinson says. “Shoppers is possibly the best known pharmacy chain in Canada with substantial market share (particularly in Ontario and in major urban areas). It should support MedReleaf’s medical cannabis export initiatives and give it major credibility with other Canadian pharmacies. We think the MedReleaf/Shoppers agreement also makes a strong case that there will be a sizable place in the medical and rec markets in Canada for premium-priced cannabis. MedReleaf should also get a credibility boost for its rec cannabis wholesale efforts with provincial government purchasing agencies.”

In a research update to clients today, Atkinson maintained his “Buy” rating and one-year price target of $19.00 on MedReleaf, implying a return of 18 per cent at the time of publication.

Atkinson thinks MedReleaf will generate Adjusted EBITDA of $3.6-million on revenue of $43.3-million in fiscal 2018. He expects those numbers will improve to EBITDA of $61.0-million on a topline of $165.2-million the following year.

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