Buy Cronos Group on weakness, GMP Securities says

With a strong balance sheet thanks and a share price that’s temptingly low, Cronos Group (Cronos Group Stock Quote, Chart, News; TSXV:CRON, NASDAQ:CRON) is now a “Buy,” says analyst Martin Landry of GMP Securities.

In a resumption of coverage on Friday, Landry lowered his target price for CRON to $9.00 per share.

Cronos just reported the closing of a previously announced bought deal public offering which netted total gross proceeds for the company of $100 million. Landry now estimates Cronos’ pro-forma cash balance at approx. $170 million, which should aid the company in its ramp-up to rec cannabis legalization, slated for late summer/early fall.

“With a reinvigorated balance sheet, Cronos has the munitions to increase capacity or make tactical investments,” says the analyst in a client note. “The company is also in a better position to capture recreational market share in Canada with its MedMen partnership.”

Also of note is the fact that Cronos’ shares are down 32 per cent since the end of January and 50 per cent off their February peak, meaning that investors now have a better entry point, says Landry, who has decreased his FY18 forecasts to reflect the later Canadian rec cannabis start date but increased his FY19 forecasts to reflect future capital deployment.

The analyst’s revenue and EBITDA estimates for 2018 are now $44.5 million and $11.6 million, respectively, while for 2019 they are $179.3 million and $59.4 million, respectively.

The analyst’s target of $7.00 is down from $9.00 and is based on a DCF using: a discount rate of 9.5 per cent, a seven per cent share of the Canadian rec market (was four per cent previously), an EBITDA margin of 30 per cent and a terminal growth of three per cent.

The analyst has upgraded his recommendation from “Hold” to “Buy,” while the $7.00 target price represents a potential return on investment of 20.8 per cent at the time of publication.