A 75 per cent increase in share price over the past nine months doesn’t tell the whole story for cannabis sector investor and operator CannaRoyalty (CSE:CRZ), says analyst Vahan Ajamian of Beacon Securities, who claims that the company’s recent acquisitions drastically improve its financial condition.
The analyst resumed coverage on Friday by reiterating his “Buy” rating with an increased target price of $5.50.
On March 27, Ottawa-based CannaRoyalty announced the acquisition of 100 per cent of River Distribution and its affiliates, which represent a number of leading brands in California as well as two licensed cannabis distribution facilities in the state.
“Our extensive distribution network in California makes us an ideal partner for brands that are looking to grow in California at scale and a carefully selected portfolio of manufacturing partners also make us a superior partner for dispensaries seeking one-stop access to a full spectrum of top products and brands in an efficient and cost-effective manner,” said Marc Lustig, CEO of CannaRoyalty, in a press release. “[The River Distribution acquisition] is a major milestone on CannaRoyalty’s journey to building a global cannabis consumer product platform through consolidation of its existing holdings with some of California’s leading operators.”
Along with the River Distribution pickup, CannaRoyalty has acquired Bhang Vapes and Bhang Edibles (Kaya), along with Alta Supply, a California distributor. Ajamian says that the four acquisitions together generated revenue of US$40 million in 2017.
“With California since having started recreational sales, we believe these assets should be able to comfortably increase their collective top line by 50 per cent, putting CannaRoyalty at a $76 million run rate currently from these acquisitions alone,” the analyst writes. “However, just as important, in our view, is their synergistic nature (i.e., with the ability to distribute product to hundreds of dispensaries across the state, CannaRoyalty can now push its entire roster of products, including Soul Sugar Kitchen edibles and Greenrock Botanical vapes into more stores – as well as obtain superior market intelligence on what is selling well etc.)”
Ajamian thinks CRZ will produce revenue and EBITDA in FY2018 of $66.8 million and $4.2 million, respectively, and revenue and EBITDA in FY2019 of $136.2 million and $20.9 million, respectively. His $5.50 target (up from $4.75) translates to an EV/2019 EBITDA multiple of 15.2x and represents a potential 12-month return on investment of 50 per cent as of publication date.