Following a run-up in its share price, GMP Securities analyst Martin Landry thinks Cronos Group (TSXV:MJN) is looking fully valued at current levels.
On Wednesday, Cronos Group announced the closing of a bought deal financing that saw the company raise approximately $46-million. The offering was underwritten by a syndicate led by PI Financial Corp. and included GMP Securities, Beacon Securities, and Cormark Securities.
In a research update to clients today, Landry resumed coverage of the stock. The analyst simultaneously raised his price target on Cronos, from $4.50 to $11.00, but lowered his rating on it, from “Buy” to “Hold”. His new target implied a return of 1.5 per cent at the time of publication.
Landry says there is a lot to like about Cronos, just not at its current share price, which has more than quadrupled since September.
“We like MJN’s growth profile with a large domestic capacity expansion, and a strong international platform, the analyst says. “However with shares trading at ~17x CY19 sales, MJN’s valuation is the highest amongst peers under coverage based on our forecasts, and adequately reflects the bright outlook. Hence our downgrade is mainly based on valuation which we would revisit pending a pullback in share price. Our target is based on a DCF using: 1) a discount rate of 9.5% (10% prior), (2) avg. market share of 4% and avg. EBITDA margin of 30% (32% prior), and (3) terminal growth of 3%.
Landry thinks Cronos Group will generate EBITDA of negative $3.2-million on revenue of $4.5-million in fiscal 2017. He expects those numbers will improve to EBITDA of positive $19.2-million on a topline of $64.3-million the following year.