The merger of cannabis companies Hiku Brands (Hiku Brands Stock Quote, Chart, News: CSE:HIKU) and WeedMD (WeedMD Stock Quote, Chart, News: TSXV:WMD) will create a well-financed, vertically integrated premium brand house, says Greg McLeish, analyst for Mackie Research. In an update to clients on Thursday, McLeish reiterated his “Buy” recommendation and $3.75 target price for HIKU.
On Thursday, Hiku Brands announced that WeedMD has obtained an interim order from the Ontario Superior Court of Justice authorizing the holding of an annual and special meeting of WeedMD shareholders, set for July 11, to consider the previously announced merger, one which would see Hiku become the majority stakeholder at 51.75 per cent and WeedMD at 48.25 per cent.
McLeish says the merger — which will create an entity with fully funded capacity for over 55,000 kg of cannabis annually as well as pro-forma cash of approx. $70 million — has a number of benefits, including improved control over the entire cannabis value chain, complementary strengths, diverse brand portfolio and expanded retail network.
“The transaction combines Hiku’s portfolio of brands, visionary marketing and experiential retail stores with WeedMD’s scalable cannabis production capabilities, deep genetics library, and innovative research and development initiatives,” says McLeish.
The analyst has updated his financial forecasts for Hiku to take the merger into account, now calling for revenue and EBITDA in 2018 of $28.9 million and negative $21.9 million, respectively, and revenue and EBITDA in 2019 of $190.4 million and $35.5 million, respectively.
McLeish’s valuation stems from applying a 12x EV/EBITDA multiple to his 2020 estimate and using a 15 per cent discount rate. His $3.75 target represents a projected return of 175.7 per cent at the time of publication.