Cronos Group gets new $10.00 target at GMP

A “significant” new development has GMP Securities analyst Martin Landry raising his price target on Cronos Group (TSX:CRON).

Last week, Cronos Group announced that it had entered into a supply agreement with Cura Select Canada that will see the latter purchase a minimum of 20,000 kilograms of cannabis per annum from the former.

“We are thrilled to be partnering with one of the cannabis industry leaders in extraction technology and value-added products,” Cronos CEO Mike Gorenstein said. “This supply agreement is the start to a synergistic collaboration for our newly created entity Cronos GrowCo and through the structure with Cura, is the type of creative and forward-thinking partnership that is at the core of industry-leading infrastructure that Cronos seeks to establish.”

Landry says this pairs with another recent partnership to provide a growth engine for the company.

“Cronos partnered with a significant cannabis industry player in Cura Cannabis Solutions, providing a solid endorsement,” the analyst says. “While Cronos trades at a premium to its peers, the MedMen and Cura partnerships should accelerate its growth and retail presence which justifies a valuation premium, in our view. In addition, Cronos has a near-term potential catalyst under a scenario where Ontario moves to a private retail format, given the MedMen JV.”

In a research update to clients Friday, Landry maintained his “Buy” rating, but raised his one-year price target on the stock from $9.00 to $10.00, implying a return of 26.9 per cent at the time of publication.

Landry thinks Cronos will generate Adjusted EBITDA of $8.5-million on revenue of $41.6-million in fiscal 2018. He expects those numbers will improve to EBITDA of $55.1-million on a topline of $170.7-million the following year.

“We are not changing our forecasts as they already accounted for significant revenue growth in 2019 and beyond,” the analyst adds. “However, the agreement announced with Cura provides good visibility on future revenue growth. Our target price is based on a DCF calculation using: 1) a 9% discount rate (9.5% previously), 2) an average share of 7% for the Canadian recreational market, 3) average EBITDA margin of 30%, and 4) terminal growth of 3%. We have reduced our discount rate to reflect improved visibility and forecast de-risking.”