CannaRoyalty has 57 per cent upside, says PI Financial

Responding to CannaRoyalty Corp.’s (Quote, Chart CSE:CRZ) second quarter earnings report, analyst Jason Zandberg of PI Financial says the company’s value-focused acquisition strategy is paying off, as he notes an uptick in sales driven by two recent pickups.

In an update to clients on Thursday, Zandberg maintained his “Buy” rating and $8.00 target price.

This week, Ottawa-based CannaRoyalty —which began as an investment firm but has since developed products, logistics and distribution businesses in California as well as five other states, Canada and Puerto Rico — announced its Q2/18 financials, featuring revenue of $3.5 million, an EBITDA of $10.4 million and EPS of $0.18. CEO Marc Lustig says the quarter proved to be a turning point for his company.

“Q2 is the beginning of a multi-quarter parabolic step change in revenue, powered by sequential acquisitions and organic growth,” says Lustig. “CannaRoyalty generated a record $3.5 million in revenue this quarter, a 446 per cent increase from Q1 and more than the Company generated in all of 2017. These results reflect the successful initiation of the Company’s strategic focus on building its Californian distribution and brands platform. This growth is expected to continue in Q3 and Q4 as FloraCal and RVR are added to the Company’s financials and as our team continues to grow market share and expand the Company’s supporting manufacturing and value-add services footprint.”

Zandberg says CannaRoyalty’s sales came in below his $4.3 million estimate, although EBITDA and EPS exceeded his expectations of negative $3.6 million and negative $0.05, respectively, and were influenced by a gain on investments of $15.2 million from the sale of its stake in Anandia Labs to Aurora Cannabis.

“Q2 was a record-breaking quarter for CannaRoyalty, as the recently acquired Kaya Management and Alta Supply have been integrated and drove the sales numbers substantially,” says Zandberg. “Gross margin improved due to established distribution and consistent sales flow.”

“CannaRoyalty’s value-focused acquisition strategy has proven fruitful once again, with Alta Supply and the imminent acquisition of RVR Distribution expected to double its distribution network by year-end,” he says.

Zandberg has made adjustments to his forecasts, now estimating that CannaRoyalty will generate revenue and EBITDA in FY18 of $40.8 million and $2.5 million, respectively, and revenue and EBITDA in FY19 of $100.5 million and $10.4 million, respectively. His 12-month target of $8.00 stems from an EV/EBITDA of 11.6x his FY20 estimates (formerly 13x) and represents a projected return of 56.8 per cent at the time of publication