The Hydropothecary Corp has double-digit upside, Canaccord Genuity says

While real estate may be all about location, location, location in real estate, the same could be said about the pot market in Canada, where Gatineau, Quebec’s The Hydropothecary Corporation (The Hydropothecary Corp. Stock Quote, Chart, News: TSXV:THCX) has secured a purchase commitment from Quebec’s liquor board. The deal makes THCX the leading supplier for Quebec, which is enough to warrant a new target price by analysts Matt Bottomley and Neil Maruoka at Canaccord Genuity, who maintain their “Speculative Buy” rating and a raised target of $5.75.

With a market cap currently in the $800 million range and future production goals of around 100,000 kg, licensed medical marijuana producer The Hydropothecary Corporation may not be the biggest fish in the Canadian pond, but it still may end up being the dominant player in “la belle province,” thanks to its digs being on the Quebec side of the Ottawa River.

“This supply arrangement is an important step for Hydropothecary,” says Sebastien St-Louis, CEO and co-founder of THCX, in a press release. “We are honoured by the opportunity to supply cannabis in our home province and we want Quebecers to know that we are committed to providing safe and high-quality products for the adult-use recreational market.”

Only one of six Canadian companies now holding agreements with the SAQ (Société des Alcools du Québec), Hydropothecary’s 20,000 kg portion is the largest, which bodes well for the company going forward, say Bottomley and Maruoka.

“Although we believe it will likely take time for each province to ramp up sufficient infrastructure to satisfy total recreational demand, we estimate that Quebec (which houses >20% of the Canadian population) could eventually require >100,000 kg over the long term and that Hydropothecary has secured the leading position with the province out of the gate,” say the analysts in a note to clients dated Wednesday, February 14.

“In our view, [THCX’s] relationship with the province of Quebec as a domestic cultivator was likely critical to receiving the leading order from SAQ,” say the analysts. “We believe the 20,000 kg order could translate into revenues of $80 million to >$100 million, depending on pricing and product mix.”

The analysts say that THCX’s relative valuation remains attractive, with Hydropothecary currently trading at 9.4x its two-year forward EV/EBITDA (seen as a discount in comparison with its direct peers at 13.7x and the large cap LPs at 18.9x).

The analysts have lowered their risk level for the company not meeting recreational cannabis estimates from 15 per cent to 13 per cent and maintain their “Speculative Buy” rating with an increased target price of $5.75, which is up from $5.25 and represents a 12-month return on investment of 37.6 per cent at the time of publication.