Canopy Growth Corp’s huge cash position could produce a surprise: GMP

His price target is roughly the same as the current price of the stock, but GMP Securities analyst Martin Landry thinks Canopy Growth Corp’s (TSX:WEED) huge treasure chest could lead to an upside surprise.

On June 15, WEED announced that it had upsized its previously announced offering of convertible senior notes due 2023 to $500-million, part of which management said would be earmarked for expansion.

Landry says an extra half billion dollars could end up producing a surprise or two.

“With the recent financing, Canopy’s cash balance is the largest of the industry sitting at ~$800m, an enviable position. Our target price is based on a DCF using: 1) an 8% discount rate, 2) a 28% share (25% previously) of the Canadian recreational market, and a 28% EBITDA margin (unchanged), and (3) a 3% terminal growth. While our return to target is low, it does not account for future potential capital deployment beyond announced expansion plans, something we would anticipate given the excess cash balance.”

In a research update to clients today, Landry maintained his “Buy” rating and one-year price target of $40.00 on Canopy Growth Corp, implying a return of 1.5 per cent at the time of publication.

Landry thinks Canopy will generate EBITDA of negative $30.3-million on revenue of $78.7-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $58.3-million on a topline of $382.3-million the following year.

The analyst today also addressed Canopy’s upcoming Q4, 2018 results. He expects fourth quarter revenue will come in at $23.7-million, in line with the street consensus of $24.0-million. Landry thinks revenue growth will be lower than in quarters past as the company builds inventory for the recreational market, and that operating expenses will continue to increase as the company expands globally. He summarized the key data points he will be looking at from Q4.

“1. Production costs. Over the last four quarters Canopy has been able to reduce its cost per gram before shipping and fulfillment from $1.46 to $1.03. We project this trend to continue as the company improves yields.

2. BC Tweed may weigh on gross margin. While costs to harvest and post-harvest costs are expected to decrease, this will likely be offset by ramp-up costs at BC Tweed and other facilities. Recall that COGS in Q3FY18 were impacted by $2.9m. This impact should be larger in Q4FY18 as BC Tweed entered into cultivation during the quarter with no associated revenues.

3. Selling prices. We have modeled selling prices $8.38/gram in Q4 up sequentially from Q3FY18 at $8.30/grams. The company’s product mix is expected to continue to shift to value added products. Discussion with industry participant point to a continued health market for B2B sales suggesting promotional activity may have slowed down as LPs try to build inventory.

4. Details on recreational stores. Canopy is building a retail network with a presence in Newfoundland, Manitoba and Saskatchewan. We will look for details on timing of store opening, start-up costs and expected revenue levels.”