Buy Plus Products for 75 per cent upside, PI says

California-based edibles manufacturer Plus Products (Plus Products Stock Quote, Chart CSE:PLUS) could add another $12 to $15 million in revenue through the purchase of its cannabis oil supplier Emerald Bay Wellness, says PI Financial analyst Jason Zandberg, who in a corporate update to clients on Thursday reiterated his “Buy” rating and C$7.75 target for PLUS.

Plus Products on Thursday announced it had acquired an option to purchase Emerald Bay, which currently provides Plus with the cannabis oil it uses to make gummies and mints. The deal grants Plus the irrevocable right but not the obligation to purchase Emerald Bay for 1.2 million subordinate voting shares, $250,000 in cash and forgiveness of a $250,000 loan which Plus is to provide Emerald Bay. The payment is subject to performance targets including achieving $28 million in revenue over a two year period. (All figures in US dollars unless noted otherwise.)

Zandberg says that exercising the option would give Plus vertical integration and thus higher gross margins, better quality control and new revenue streams (adding approximately $12 to $15 million in revenue per annum), while if it doesn’t exercise the option, Plus ensures that one of its key suppliers has sufficient funding to continue to supply quality oil for Plus.

“We believe that PLUS Products represents the best way for investors to gain exposure to the fast growing cannabis edibles market in the US. In California, PLUS’ Uplift and Restore gummies are the top two selling edible products and PLUS has recently announced its launch into Nevada. We believe purchasing Emerald Bay will allow PLUS to continue to be among the fastest growing cannabis companies without the concern of obtaining cannabis oil as its sales volumes increase in the future,” says Zandberg.

The analyst thinks Plus will generate fiscal 2019 revenue and EBITDA of $23.1 million and negative $4.5 million, respectively. His C$7.75 target represented a projected return of 74.9 per cent at the time of publication.