Flower One Holdings has a 228 per cent upside, Mackie Research says

US cannabis company Flower One Holdings (Flower One Holdings Stock Quote, Chart CSE:FONE) is well-positioned to take advantage of the young but booming pot market in the state of Nevada, says Mackie Research analyst Greg McLeish, who in a coverage launch on Tuesday rated FONE a “Buy” with a C$4.50 target price, representing a projected 12-month return of 228 per cent.

Flower One, which began trading on the CSE in October, is a cannabis cultivation and production company with two medical and two recreational cultivation licenses in Nevada, as well as an additional five licenses acquired through the (now completed) acquisition of NLV Organics. Flower One is in the process of retrofitting NLV’s 455,000 sq. ft. greenhouse, which the company estimates will be capable of producing more than 63,500 kg of cannabis per year.

Only a year and a half old, Nevada’s recreational cannabis market has taken off, producing revenue of $424.9 million in its first fiscal year to go along with $105 million in medical cannabis. Sales have been strong enough to cause a supply shortage, which means strong wholesale cannabis pricing over the short term, says McLeish, who argues that cheaper product will likely entail more cannabis sold. (All figures in US dollars unless noted otherwise.)

“We forecast that wholesale prices will fall in Nevada as more cultivation capacity comes online which will reduce the current supply/demand imbalance,” says McLeish. “In more mature markets such as Colorado the wholesale price for dried flower declined from $2,007 per pound in January 2015 to $1,265 per pound in January 2018. However, according to data from state regulators such as the Colorado Department of Revenue, consumers have been taking advantage of these lower prices by buying greater quantities and this is evidenced by the fact that revenue from cannabis continues to rise year after year.”

“We forecast that the majority of companies operating in the cannabis sector will not experience material revenue or earnings growth until at least 2019 or 2020. As a result, we value Flower One based on our financial projections through 2020,” says McLeish.

“However, investing in the cannabis sector is not for the faint of heart since companies operating in the sector will most likely experience both regulatory and operational challenges,” he says. “While Flower One could experience operational challenges ramping up its new 455,000 sq. ft. facility, management’s knowledge of high-density agriculture should help to de-risk this process which should result in strong revenue and earnings growth through our forecast period.”

McLeish puts his valuation for Flower One at an 8.0x EV/EBITDA multiple of his 2020 estimates, which he says compares to an industry-wide average of 8.5x.