Analyst Jason Zandberg of PI Financial says although Q2 results from cannabis company Canopy Growth Corp. (Canopy Growth Corp. Stock Quote, Chart: TSX:WEED, NYSE:CGC) came in below expectations, the numbers do not take recreational sales into account due to the October 17 legal rec start date. Banking on Canopy’s penetration in both the Canadian and international cannabis markets, Zandberg is maintaining his “Buy” rating and $60.00 target.
This week, Smiths Falls, Ontario’s Canopy Growth reported its second quarter of fiscal 2019 (ended September 30) financials, producing revenue of $23.3 million, a 33 year-over-year increase, and EBITDA of negative $57.7 million, which compares to last year’s Q2 EBITDA of negative $6.2 million. The company sold 2,197 kg of cannabis over the quarter.
“With extensive investments over the past year, including most notably in the second quarter, in branding and retail development, our entrance into the retail cannabis market has been a success with our shop keeping unit assortment obtaining over 30 per cent listings market share in multi-store physical retail store networks nationwide,” said Bruce Linton, Chairman and Co-CEO, in a press release.
“With substantial product inventories on hand, new product formats coming to market as planned, a captive sales force driving increased demand through physical retail stores and increasing internal and channel efficiencies, we believe based on market conditions today that we will attain significant and sustainable market share of the Canadian recreational market,” Linton said.
Of the Q2, Zandberg notes that Canopy’s cannabis oil sales represented 34 per cent of its product revenue compared to Q1, while total cannabis harvesting over the quarter was 15,217 kg, bringing Canopy’s inventory at the end of Q2 to $150 million. Zandberg says that the large amount of product puts Canopy in a favourable position heading into the recreational market.
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“WEED emphasized a focus on supplying physical stores over online channels during the start of the adult-use market,” says Zandberg in a note to clients on Wednesday. “The company believes they can better position their products with end customers through building strategic relationships with physical store owner’s vs having customers randomly select products from an online portal. We note that this decision may initially impact WEED’s market share in Ontario as the province will not have any retail locations until April 2019.”
“WEED has over $5 billion in cash on its balance sheet (~$10.00/share) that is expected to be deployed towards international expansion opportunities including the European medical market as well as potentially the hemp market in the US,” he says. “We believe WEED is well positioned to capture significant market share as these markets open up. Our target is 51x our FY21 EV/EBITDA estimate (previously 43x) which represents the significant market potential in Canada and the international markets.”
Zandberg has lowered his estimates, now calling for FY2019 revenue and EBITDA of $245 million and negative $47.6 million, respectively, (was $302 million and $9.9 million, respectively), while leaving his FY2020 and FY2021 estimates largely unchanged.
The analyst’s $60.00 target price represents a projected 12-month return of 33 per cent at the time of publication.