Canopy Growth Corp. gets new $60.00 price target at PI Financial

Canopy Growth Corp’s (TSX:WEED, NYSE:CGC) new buy-in from liquor company Constellation Brands will be key to the licensed cannabis producer’s build out into the international market, says Jason Zandberg of PI Financial.

On Wednesday, the analyst raised his target price for WEED to $60.00 (previously $45.00) while maintaining his “Buy” recommendation.

Overshadowing the company’s fiscal first quarter results, the announced deal will see Constellation acquiring 104.5 million shares from Canopy at $48.60 per share, a more than 50 per cent premium to WEED’s Wednesday share price and equating to roughly $5 billion.

By far the largest deal in Canada’s fledgling cannabis sector, the investment increases Constellation’s ownership interest in Canopy from a previous ten per cent to 38 per cent. The deal also involves Constellation receiving additional warrants of Canopy worth up to another $4.5 billion in shares if exercised, bringing Constellation’s ownership in Canopy above 50 per cent.

Zandberg says the deal will push forward Canopy’s global ambitions. “The ~$5 billion proceeds from the investment will be used to strategically build and/or acquire key assets around the globe in the 30+ countries pursuing federally permissible medical cannabis programs,” says Zandberg in an earnings update to clients yesterday. “This will lay the foundation for the opening up of future recreational markets where WEED will have an early mover advantage.”

The news came as Canopy delivered its fiscal Q1/19 financials, which featured revenue that came in-line with consensus expectations at $25.9 million, up 63 per cent year-over-year, while WEED’s EBITDA was larger than expected: a loss of $22.5 million, compared to a $3.9 million EBITDA loss in Q1/18.

“We are maintaining our Buy rating (risk: Speculative) but increasing our 12-month target price to $60.00 (previously $45.00),” says Zandberg. “The increase in our target reflects the ~$15.00/share in cash provided by this investment. Our target is 43x our FY21 EV/EBITDA estimate (previously 28x) which represents the significant market potential in Canada and the international markets.”

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The analyst sees Canopy producing EBITDA and revenue in FY19 of $9.9 million and $301.7 million, respectively, and EBTIDA and revenue in FY20 of $181.4 million and $752.0 million, respectively.

Zandberg’s $60.00 target represents a projected 42.2 per cent return at the time of publication.