PI Financial analyst Devin Schilling is bullish on Medipharm Labs (Medipharm Labs Stock Quote, Chart TSXV:LABS), which he says is a leader in the pharmaceutical grade cannabis extraction industry.
In a coverage initiation on February 14, Schilling rated LABS a “Buy” with a Speculative risk rating and price target of $4.25, representing a 12-month return of 72 per cent at the time of publication.
Founded in 2015 and commencing trading on the TSXV on October 4, 2018, Barrie, Ontario-based Medipharm Labs is a producer of purified cannabis oil and cannabis concentrates for advanced derivative products. The company has secured four wholesale cannabis oil agreements with Canadian licensed producers, including one with industry leader Canopy Growth Corp. The company also has long-term cannabis concentrate contract processing agreements (tolling agreements) with James E. Wagner, Emerald Health, Indiva, The Supreme Cannabis Company and TerrAscend.
Schilling says he’s bullish on the extraction segment of the market for a number of reasons: changing consumer preferences indicate that cannabis concentrates could eventually account for more than 60 per cent of the overall cannabis market; price compression for concentrates and edibles dried cannabis looks to be less pronounced when compared to the dried cannabis market; there are fewer agricultural risks to pure-play extraction businesses when compared to cultivators; there are fewer marketing restrictions for extraction companies; and the barriers to entry are significant.
The analyst expects that some of the larger licensed producers are likely to bring extraction in-house but that there is little evidence of this so far, as witnessed by Canopy Growth’s extraction agreements with numerous extraction companies.
“A large LP may look to purchase MediPharm at some point to bring this service in-house,” says Schilling. “We believe small- to-medium sized LP’s will always outsource their extraction needs as building out an extraction lab and hiring a dedicated extraction team does not make economic sense without the large quantities of biomass required to keep the facility running on a continual basis.”
Schilling sees LABS generating fiscal 2019 EBITDA of $7.6 million on revenue of $86.2 million and fiscal 2020 EBITDA of $31.6 million on a top line of $137.1 million.