EnWave’s stock has room to climb, says Industrial Alliance

Cannabis’ potential for dehydration tech company EnWave (EnWave Stock Quote, Chart TSXV:ENW) is starting to bear fruit, says Neil Linsdell, analyst for Industrial Alliance Securities, who on Thursday reiterated his “Buy” recommendation and $2.75 target price, representing a projected return of 17 per cent at the time of publication.

Vancouver’s EnWave reported its second quarter fiscal 2019 earnings on Wednesday, which featured a year-over-year top line increase to $8.8 million and Adj. EBITDA of $1.0 million (11.4 per cent margin). Revenue was above Linsdell’s forecast of $8.7 million, while EBITDA was below his expected $1.6 million.

The analyst remarks that Moon Cheese from NutraDried, EnWave’s wholly owned subsidiary, continues to power sales with revenues of $6.8 million, a whopping 186 per cent year-over-year improvement.

In other recent developments, EnWave has announced that Edmonton-based cannabis company Aurora Cannabis is exercising its license option to use EnWave’s REV machinery for drying its cannabis in South America, excluding Peru, and the purchase of a 60kW unit. EnWave and Aurora announced a royalty-bearing agreement for the European Union in April.

Linsdell views the event as a positive.

“EnWave’s REV technology offers licensed cannabis producers the fastest (1 hour versus five to seven days) and most controllable process to dry and decontaminate cannabis in its natural state without any additives (which prevents microbial contamination). As such, Aurora’s facilities will benefit from CAPEX savings on drying space and related HVAC investments, as well as free up space for the purpose of increasing production,” he says.

“The big long-term benefit of supplying REV units to the cannabis industry is in the royalties paid to EnWave based on volume/value produced. Unlike royalties from other food and snack producers, where products can face customer acceptance risks, we see limited risk in the acceptance of cannabis in the immediate future. Additionally, we anticipate that equivalently sized REV units can produce 2-3x the royalties drying cannabis than other food products given the high value per volume ratios,” he says.

Linsdell has raised his revenue forecast for fiscal 2019 from $42.7 million to $47.3 million while dropping his Adjusted EBITDA forecast from $8.4 million to $5.0 million.