The Hydropothecary Corporation is a buy, says Echelon Wealth

Gatineau, Quebec’s The Hydropothecary Corporation (TSXV:THCX) gets a 12-month target price increase from Echelon Wealth Partners’ Russell Stanley, who sees the licensed cannabis producer to be trading at a discount to its peer group of cannabis companies.

On Thursday, the analyst’s research update reiterated his “Speculative Buy” rating with a new target of $6.75 (up from $5.50).

Attending the Hydropothecary Corp.’s Investor Day in New York City on Wednesday, Stanley says the key takeaway was that the company expects dried cannabis to eventually be commoditized, and thus that the real money will be in consumer packaged goods.

The analyst agrees with this premise.

“Management’s overall goal is to become a consumer packaged goods (CPG) company with 35-40 per cent EBITDA margins, with straight cultivation operating margins likely trending to the mid-single digit range over time as supply increases,” he says.

“Geographically, management views its penetration of the Québec market as the beachhead for its expansion into other provinces, predominantly to the west. Once the Company’s position in Canada has been strengthened, and adult-use is legalized in other markets, international expansion becomes a bigger priority,” says Stanley.

Stanley asserts that THCX is second only to Canopy Growth Corp in terms of aggregate sales commitments but that relative to its capacity plans (108,000 kg of dried cannabis annually), the Hydropothecary has pre-sold more of its production than any other licensed producer.

The analyst says that potential catalysts going forward include supply contract developments, expansion progress updates, product development news, a TSX graduation and improved financial results. The analyst also notes that THCX’s fully-funded capacity expansion plans and sales visibility make it an attractive M&A candidate.

The $6.75 target price comes from a 19x C2019 EBITDA estimate valuation multiple and represents a projected return of 33 per cent at the time of publication.