MedReleaf has substantial upside, GMP says

Following a financing that cashed up the company’s balance sheet, GMP Securities analyst Martin Landry is feeling bullish about MedReleaf (MedReleaf Stock Quote, Chart, News: TSX:LEAF).

On Monday, Medreleaf announced it had closed a bought-deal private placement that netted it $100.5-million.

“The company intends to use the net proceeds from the treasury offering to finance the acquisition and/or construction of additional cannabis production and manufacturing facilities in Canada as well as in other jurisdictions with federal legal cannabis markets, where warranted by the opportunities available to Medreleaf, and the expansion of the company’s marketing and sales initiatives,” management said in a press release. “If the overallotment option is exercised, the company intends to use the additional net proceeds for working capital and general corporate purposes. The company did not receive any of the net proceeds from the secondary offering and all of such proceeds went to the selling shareholders.”

Landry says Medreleaf’s plans could ultimately be a real boost to its EBITDA numbers. He says the stock’s performance spells an opportunity for investors in the sector.

“LEAF shares have underperformed the broader cannabis sector recently, down 8% in the last two weeks vs senior LP peers up 20-25% on average,” the analyst says. “With potential upside from future cash deployment, combined with management’s strong track record of ROIC generation, we believe this underperformance is unwarranted and thus provides an attractive entry point. We consider MedReleaf as a top tier Canadian LP supported by the company’s robust brand recognition, product quality, and low production costs. Hence, the current discount of 30% to Canada’s three largest LPs seems unjustified in our view. Our target is based on a DCF using: 1) discount rate of 8%, 2) avg. market share of 7% and an avg. EBITDA margin of 34% (unchanged), and 3) a terminal growth of 3%.”

In a research update to clients today, Landry maintained his “Buy” rating and one-year price target of $20.00 on Medreleaf, implying a return of 29 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.