Buy CannaRoyalty for exposure to California weed market, Beacon says

A timely deal for CannaRoyalty (CSE:CRZ) makes it the perfect way for investors in the Canadian markets to play the potentially huge implications of California legalizing marijuana yesterday, Beacon Securities analyst Vahan Ajamian says.

Yesterday, following a November vote that garnered more than 57 per cent support, California became the sixth and most populous state to allow the sale of recreational marijuana

“It is probably our busiest day in our seven-year history,” Matt Lucero, the owner of San Jose dispensary Buddy’s told CNN. “We have folks outside; every chair in the building is filled right now.”

CannaRoyalty issued a press release today cheering the development and claiming, partly through its pending acquisition of Kaya Management Inc., which owns Bhang brand vaporizer products, that it has the broadest exposure of any pubco to the California market, where it estimate annual sales will be $2.8-billion.

“Jan. 1 marked the transition of the largest and most sophisticated cannabis market globally into a recreational adult-use market and CannaRoyalty is strongly positioned to benefit as this market grows over the next five years,” CEO Marc Lustig said. “With our proposed acquisitions of the manufacturer of Bhang brand vaporizer products in California and Alta Supply Inc., we are in the process of adding significantly to our footprint in the state. Distribution is a competitive advantage to our brand portfolio and it is an area where we anticipate continued expansion. At the launch of the California recreational market, we have access to over 800 dispensaries California-wide, four proprietary brands in distribution and through Alta Supply we will be the exclusive distributor for some of the best-known brands in global cannabis. Two thousand eighteen is an exciting year for California and because CannaRoyalty is one of the best avenues for public market investors to gain exposure to the state we expect it to be an exciting year for shareholders as well.”

Ajamian says this development could be a catalyst for CannaRoyalty, which he sees as undervalued.

“California is the premier cannabis market in the world – and we believe CannaRoyalty is almost the only way for public company investors to be exposed to it (and via value-added brands, technology and ancillary services),” the analyst says. “Despite this, CannaRoyalty’s market cap, at just $171MM pales in comparison to that of most Canadian LPs, which for the most part do not have such a plethora of branded products. Further, while it has Canadian assets/revenue, CannaRoyalty’s shares trade at a discount to even pure play U.S. cannabis operators. While they closed at an all-time high to end 2017, we see compelling value at CannaRoyalty’s shares at current levels and believe they will continue to trade higher.”

In a research update to clients today, Ajamian maintained his “Buy” rating, but raised his one-year price target on CannaRoyalty from $4.25 to $4.75, implying a return of 27 per cent at the time of publication.

Ajamian thinks CannaRoyalty will generate EBITDA of negative $6.3-million on revenue of $3.2-million in fiscal 2017. He expects those numbers will improve to EBITDA of positive $100,000 on a topline of $42.2-million the following year.