The Supreme Cannabis Company has a 72 per cent upside, GMP says

Following the company’s second quarter results, GMP Securities analyst Robert Fagan remains bullish on The Supreme Cannabis Company (The Supreme Cannabis Company Stock Quote, Chart TSXV:FIRE), if a little less so.

On Tuesday, FIRE reported its Q2, 2019 results. The company lost $1.55-million on revenue of $7.72-million, a topline that was up 359 per cent over the same period last year.

“”We’re pleased with our second quarter results, which show meaningful revenue growth quarter over quarter and continues to reflect our strong operational execution,” CEO Navdeep Dhaliwal said. “Since Supreme received its licence over two years ago, we have been one of the fastest-scaling licensed producers in Canada, demonstrated by one of the strongest first years of revenue in the sector. During the second quarter, we made our first shipments of 7Acres-branded product to adult-use markets in six provinces. The consumer feedback has been overwhelmingly positive. Cannabis enthusiasts are vocal about their passion for high-quality cannabis. We believe 7Acres has quickly established itself as Canada’s only premier cannabis producer at scale. With construction on the flowering room at 7Acres scheduled to be completed by the end of March, we’re looking forward to increasing our production capacity to help meet consumer demand and drive further revenue growth throughout the year. This quarter validated many aspects of our consumer-driven market thesis and demonstrates the strength of our intellectual property around scaled cultivation.”

Fagan says this was a “mixed” quarter, with solid growth in sales, but profitability that was lower than expected. But the analyst still thinks the stock represents good value.

While Q2FY19 EBITDA was below expectations, we note FIRE has experienced lumpiness in its profitability in past quarters, particularly those ahead of increases in capacity, which has occurred this quarter. However, with significant workforce additions already completed, expected increases in volume and pricing remaining strong (premium flower price up 15% YoY),in our view, this improves our visibility over FIRE’s near-term profitability. To this end, we expect FIRE to generate material EBITDA by mid-year CY19, representing a relatively quick path to profitability as compared to peers. Lastly, we note FIRE’s valuation remains attractive at ~7x CY20 EBITDA, a significant discount to peers, and with a robust balance sheet including ~$92m in cash.”

In a research update to clients today, Fagan maintained his “Buy” rating on Supreme Cannabis, but lowered his one-year price target on the stock from $3.50 to $3.25, implying a return of 72 per cent at the time of publication.

Fagan thinks FIRE will post EBITDA of negative $1.1-million on revenue of $47.0-million in fiscal 2019. He expects those numbers will improve to EBITDA of positive $58.3-million on a topline of $172.4-million the following year.