Cronos Group is still a buy, GMP says

Despite some recent hiccups, GMP Securities analyst still thinks there is plenty of value in Cronos Group (Cronos Group Stock Quote, Chart, News: TSXV:CRON).

On Tuesday, Cronos Group reported its Q1, 2018 results. The company posted Adjusted EBITDA of negative $1.27-million on revenue of $2.9-million, a topline that was up 473 per cent from the $600,000 the company reported in the same period last year.

“We are pleased that the strategic initiatives launched in 2017 are coming to fruition,” said CEO Mike Gorenstein said. “Two thousand seventeen was a building block year which set the groundwork and foundation for the results achieved in the first quarter. Cronos is focused on continuing to increase capacity in order to serve existing distribution and newly established markets, developing intellectual property, and launching recreational brands.”

Landry summarized the way the quarter came in.

“CRON’s Q1/18 revenues came in at $2.9m, up 83% QoQ and in line with our $2.8m forecast. Volumes at 501kg were higher than our 358kg estimate, driven by higher than expected wholesale sales (388kg vs. 150kg est.), but resulting in lower selling prices/gram ($5.88 vs. $7.84 est.) bringing revenues back in line. Costs to harvest were roughly stable QoQ at $2.18/gram, resulting in estimated gross margins of 60%, below our 68% forecast on the lower selling prices. This combined with slightly higher SG&A drove adj. EBITDA loss to –$1.3m, below our –$0.5m forecast.”

In a research update to clients Thursday, Landry maintained his “Buy” rating and one-year price target of $9.00 on Cronos Group, implying a return of 12.5 per cent at the the time of publication.

Landry thinks Cronos will generate EBITDA of $8.5-million on revenue of $41.6-million in fiscal 2018. He thinks those numbers will to EBITDA of $55.1-million on a topline of $170.7-million the following year.

“We view the issues affecting CRON’s recent results as largely temporary in nature,” the analyst adds. While CRON’s inventories will be somewhat tight in the short term, longer term the outlook remains bright with sizeable upcoming capacity, and flexibility to deploy capital globally providing a potential catalyst. Our target is based on a DCF using: 1) a 9.5% discount rate, 2) market share of 7%, 3) EBITDA margin of 30%, and 4) terminal growth of 3%.”