The completion of a new distribution deal has Canaccord Genuity analyst Matt Bottomley feeling bullish about The Hydropothecary Corp (TSX:THCX).
This morning, The Hydropothecary Corp. announced it had entered into five-year a deal to supply cannabis the Societe des alcools du Quebec (SAQ).
“Becoming the preferred supplier to the Quebec market out of the gate postlegalization is a source of great pride and a vote of confidence in our ability to scale operations to meet our supply commitment,” CEO Sebastien St-Louis said. “This agreement marks an important step in the execution of our growth strategy, which is focused initially on the Quebec market by expanding our Gatineau facilities and hiring new employees, and then establishing our presence in other Canadian markets. By doing business with Hydropothecary, the SAQ is engaging with a company that complies with the law and adheres to best practices in both corporate governance and the development and manufacturing of high-quality and safe products.”
Bottomley says this deal is a testatment to THCX’s positioning.
“We believe that Hydropothecary’s lead purchase order and five-year commitment from the SAQ confirms that location matters,” the analyst says. “While it is not the largest LP by market cap or infrastructure built to date, in our view its relationship with the province of Quebec as a domestic cultivator was likely critical to securing its leading position. We estimate the supply of 200,000 kg of cannabis over the next five years to the SAQ could translate into cumulative revenues of ~$1 billion.”
In a research update to clients today, Bottomley maintained his “Speculative Buy” rating on Hydropothecary, but raised his one-year price target on the stock from $5.75 to $6.25, implying a return of 59 per cent at the time of publication.
Bottomley thinks THCX will generate EBITDA of negative $200,000 on revenue of $17.0-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $38.7-million on a topline of $139.0-million the following year.