MedReleaf shareholders should take the Aurora Cannabis deal, PI Financial says

Cannabis producer MedReleaf Corp (MedReleaf Corp Stock Quote, Chart, News: TSX:LEAF) reported quarterly earnings that show significant revenue growth from its cannabis oil sales, says Jason Zandberg of PI Financial, who has changed his recommendation from “Buy” to “Tender,” regarding the terms of the Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News: TSX:ACB) takeover.

Yesterday, Markham, Ontario-based MedReleaf announced its Q4FY18 financials, with CEO Neil Closner highlighting the company’s new highs for sales and volume over fiscal 2018, along with being named Top Licensed Producer at last year’s Canadian Cannabis Awards.

“I’m immensely proud of our achievements to build a reputable, respected, and enduring business founded on integrity, high quality and strong execution, and I am confident MedReleaf will bring tremendous value to Aurora, as we combine to create a preeminent global cannabis company,” says Closner in a press release.

Revenue for the quarter was up 16 per cent to $12.0 million, while EBITDA and EPS were negative $4.7 million and negative $0.08, respectively. All three numbers came in below Zandberg’s expectations, but the analyst pointed a bright spot in the company’s extracted products (including cannabis oil capsules and gel caps) whose sales grew by 145 per cent year over year.

“LEAF’s cost per gram was $1.40 during Q4 compared to $1.83 in Q3 and $1.49 in Q4 FY17. We expect costs to fall to $1.25 per gram when the Bradford facility is fully operational (within this fiscal year),” says Zandberg in an earnings update to clients on Tuesday.

The analyst says that his forecasts remain relatively unchanged, calling for FY19 and FY20 sales of $144.8 million and $262.0 million, respectively, and EBITDA for FY19 and FY20 of $29.9 million and $79.0 million, respectively.

As to the terms of the Aurora takeover deal, announced on May 14, Zandberg says that the vote on July 18 is expected to gain the required 66.7 per cent approval from LEAF shareholders. The analyst reports that 56 per cent of LEAF shareholders have entered into irrevocable hard lock-ups to vote for the transaction.

The deal has Aurora offering 3.575 ACB shares and $0.000001 in cash for every LEAF share.