Supreme Cannabis gets price target cut at GMP

Following the company’s third quarter results, GMP Securities analyst Robert Fagan has cut his price target on Supreme Cannabis (Supreme Cannabis Stock Quote, Chart TSX:FIRE).

On Monday, Supreme Cannabis reported its Q3, 2019 results. The company lost $7.13-million on revenue of $10-million, a topline that was up 382 per cent over the same period last year.

“Our Company is pleased with the results of our third quarter financials and with the progress made thus far on our strategic priorities for the 2019 calendar year. This quarter saw a marked increase in revenue on both an annual and quarter-over-quarter basis. This revenue growth was driven by an increase in our capacity at the 7ACRES facility, a ramping up of our product packaging capabilities and, we believe, consumer preference for high-quality cannabis,” CEO Navdeep Dhaliwal said. “As we report the Company’s third quarter of fiscal 2019, we reflect on our first six months of legal cannabis sales in Canada. While Supreme Cannabis was originally viewed as a contrarian for taking a consumer-oriented approach to the cannabis market, 7ACRES’ strong consumer feedback, status as a top-ten revenue producer in the industry and recognition as a coast-to-coast award-winning premium brand affirms that our approach to the Canadian cannabis market is winning with the people who will drive revenue: consumers. Our strong foundation built on cultivation IP, genetics and an excellent reputation among consumers leaves us well positioned to enter new and exciting product segments where we have a proprietary advantage over our competition. We approach our year end with the senior leadership team, strategic agreements and brands in place to drive growth into fiscal 2020.”

Fagan says he regards this result as a “slight miss” and says the near-term outlook for FIRE has become more subdued.

“While FIRE’s SG&A cost control has improved recently as predicted, this has been offset by lower production cost efficiencies as the company has rapidly expanded its facilities,” the analyst says. “In addition, the slower ramp up in production capacity overall could dampen revenue growth in the near term, with inventory levels in Q3/FY19 at ~$7m, or likely only 3.5–4.5 tonnes. Given the above, our expectations for FIRE to generate meaningful profitability have been pushed out. We are lowering our target as a result of a reduction in our FY19 and FY20 forecasts with our target derived from a DCF using; 1) 10% discount rate (no change), 2) avg. market share of ~6%, and 3) 3% terminal growth.”

In a research update to clients today, Fagan maintained his “Buy” rating but lowered his one-year price target on The Supreme Cannabis Company from $3.25 to $2.75, implying a return of 43.2 per cent at the time of publication.

Fagan thinks FIRE will post EBITDA of negative $8.6-million on revenue of $36.1-million in fiscal 2019. He expects those numbers will improve to EBITDA of positive $40.3-million on a topline of $129.6-million the following year.