Buy Supreme Cannabis for a double, GMP Securities says

The Supreme Cannabis Company (Supreme Cannabis Stock Quote, Chart: TSXV:FIRE) produced strong results over its fiscal first quarter 2019, says analyst Robert Fagan of GMP Securities, who in a Friday update to clients reiterated his “Buy” recommendation and $3.50 target price.

Supreme Cannabis reported revenue of $5.14 million and EBITDA of negative $1.2 million in its Q1/19, a solid beginning to an historic year, said CEO Navdeep Dhaliwal.

“Q1 2019 results are continued validation for the successful execution of our strategy for our 7ACRES business to establish a competitive advantage in quality driven regulated cultivation at scale,” said Dhaliwal in a press release. “We’ve established valuable intellectual property and laid a strong foundation for 2019 by amassing coast-to-coast distribution for what we believe is the only premium High-End Cannabis grown at scale in the country. Moving forward, our branding and distribution for 7ACRES will accelerate, as we’re confident that consumers will further fuel our growth as they recognize the standard 7ACRES has set in the market for premium dried flower.”

Fagan says both the Q1 top and bottom lines beat his estimates of $4.8 million in revenue and negative $1.6 million in EBITDA, a standout compared to other cannabis LPs, he says.

“Despite Q1/FY19 sales not including REC shipments to provinces, FIRE’s revenues grew significantly, up 45 per cent QoQ, on strong sales to B2B customers and better pricing, representing the third consecutive quarter of pricing increases for premium products,” says Fagan. “This reinforces our view that a shortage of premium products exists, supporting favourable pricing for FIRE’s premium offering. In our view this highlights the strategic value of FIRE’s six non-provincial supply contracts (such as Tilray) enabling FIRE to leverage the current tight wholesale supply market.”

Fagan says that Supreme Cannabis has a number of things going for it, including strong return on invested capital, a valuation that’s currently a 65 per cent discount to its broad peer group and about $175 million in cash available on top of funding for all of its existing expansion projects.

The analyst made minor changes to his forecast as a result of the Q1 and says that he remains conservative in his estimates while the company continues to ramp up production and begins direct-to-province sales, which may incur higher packaging costs.

His $3.50 target represents a projected return of 97.7 per cent at the time of publication.