GMP launches coverage of MediPharm Labs with a buy rating

Canadian cannabis company MediPharm Labs (MediPharm Labs Stock Quote, Chart TSXV:LABS) may be young but it has a bright future, according to GMP Securities analyst Martin Landry, who launched coverage of the extraction-focused MediPharm on Tuesday with a “Buy” rating and $7.50 target price.

Founded in 2015, Barrie, Ontario-based MediPharm operates a 70,000 square foot facility with a second building in Australia (MediPharm holds an 80 per cent ownership stake in MediPharm Labs Australia Pty Ltd, based in Victoria and looking to replicate the extraction facility in Barrie.

The company’s Barrie facility has its oil production and sales licenses and currently has an annual processing capacity of 150 tonnes of dried cannabis material, with plans to expand to 250 tonnes annually by Q2 2019.

Landry says that pure-play cannabis extractors are at the infancy of their development, with their inflection points of expansion in legal extract products likely coming with the passing of new legislation in Canada in the fall of this year.

“New Health Canada legislation will allow for the sale of several extract product forms this fall, such as vape pens, edibles and beverages which are all made using cannabis extracts. LABS is attractively positioned to benefit from this tidal wave by providing extraction services to Canadian LPs but also by moving up the food chain with turnkey solutions for value-added products. Value-added products should generate higher profit margins potentially shielding the company from price erosion,” says Landry.

MediPharm has just started to generate revenues, Landry points out, and has a promising outlook with several contracts announced and expected to translate into solid revenue growth of 100 per cent year-over-year in 2020.

“LABS reported its Q4/18 results which were ahead of expectations and showed significant revenue and profitability in just 90 days of operations,” he says.

Landry says LABS currently trades at an “attractive” valuation of 9x his 2020 EBITDA estimate, which is at a discount to Canadian LPs which trade at about 20x his 2020 EBITDA estimates.

The analyst sees LABS generating 2019 revenue and EBITDA of $109.4 million and $27.2 million, respectively, and 2020 revenue and EBITDA of $213.3 million and $66.6 million, respectively. His $7.50 target represents a projected return of 60.3 per cent at the time of publication.