Supreme Cannabis deserves to trade at a premium, PI says

With its third quarter results reported, The Supreme Cannabis Company (The Supreme Cannabis Company Stock Quote, Chart TSX:FIRE) can continue with its expansion plans, says analyst Jason Zandberg of PI Financial, who in an earnings update to clients on Tuesday maintained his “Buy” rating and $4.50 target price.

Toronto-based Supreme Cannabis released its Q3 fiscal 2019 (ended March 31, 2019) on Tuesday, coming in with quarterly gross revenue of $10.3 million, in-line with Zandberg’s expectation of $10.4 million, and up 382 per cent year-over-year. The company posted an EBITDA loss of $2.4 million versus a loss of $2.5 million a year ago, while its EPS was negative $0.02.

“Supreme’s Q3 revenue ranked eighth among Canadian LPs. We continue to believe that Supreme produces high quality dried cannabis for the recreational marketplace and therefore able to command the higher end of the pricing spectrum,” says Zandberg.

The analyst rates the company’s wholesale demand over the quarter as strong, with the largest shipment to Tilray. Zandberg notes that Supreme has been working with extraction company MediPharm Labs for its cannabis oil products line, which he expects will roll out in upcoming weeks, available initially in BC, Alberta and Ontario.

Other news, says Zandberg, includes a recent approval from Health Canada for its expansion plans at its Kincardine facility, which would increase production from 13,300 kg to about 33,580 kg. Also of note is Supreme’s secured LOI with Malta Enterprises, allowing the company to produce and process medical cannabis in Malta, and Supreme’s launching of a cannabis genetics company, Cambium Plant Sciences, in which the company plans to invest about $14 million.

Zandberg is forecasting fiscal 2019 sales of $27.5 million and EBITDA of negative $6.0 million. For fiscal 2020, he’s calling for a top line of $116.2 million and EBITDA of $34.0 million. The analyst’s $4.50 target represented a projected return of 127.2 per cent at the time of publication.