Cresco Labs’ deal for Origin House is looking sweeter, says GMP Securities

In a flash update to clients on Friday, GMP Securities analyst Robert Fagan reiterated his “Buy” rating and $21.50 target price for US cannabis play Cresco Labs (Cresco Labs Stock Quote, Chart CSE:CL), saying sales growth at Cresco target acquisition Origin House looks promising.

In April, Cresco Labs announced a deal to purchase marijuana brand company Origin House in a $1.1-billion all-stock deal. This Thursday, Origin House released preliminary numbers on its fiscal Q1 of 2019, which involved expected revenues of $11 million, a 39-per-cent improvement over the previous quarter. The press release notes that Origin House’s April sales were $6.5 million, however, which Fagan calls impressive, as they imply an annualized sales run-rate of about C$78 million, up about 77 per cent from the Q1 numbers. (All figures in Canadian dollars unless noted otherwise.)

“The rapid rate and acceleration of OH’s sales growth is encouraging, in our view, as it increases visibility for our forecasts for Cresco Labs, which assume OH results will be integrated beginning in Q3/19 with a US$30-million contribution for the quarter. This compares to OH’s quarterly revenue run-rate of ~$15 million as of April, which we note does not include results from OH’s recently closed acquisition of Cub City. With a current production capacity of ~1,400kg/year, and using wholesale selling prices in California of ~$2.50/gram, we estimate Cub City’s current revenue potential at ~US$3.5 million to US$4.0 million annually, which does not include any potential expansion plans which had been contemplated by OH,” says Fagan.

The analyst says he’s taking Origin House’s indicated gross margin for its Q1 of about 15 per cent to be a positive, as they could indicate that some of the company’s supply chain issues in California may now be behind it.

Fagan’s $21.50 target represented a projected return of 36.5 per cent at the time of publication.