MediPharm Labs has a 43 per cent upside, says GMP Securities

A number of catalysts are on the horizon for MediPharm Labs (MediPharm Labs Stock Quote, Chart TSXV:LABS), according to GMP Securities analyst Ryan Macdonell, who on Monday issued an update to clients.

Based on the company’s just-closed equity financing round, Macdonell is maintaining his “Buy” recommendation but reducing his target price from $8.00 to $7.75.

Cannabis oil extraction company MediPharm announced the closing of its approximately $75 million bought deal financing round on Monday, at an offer price of $5.55 per share and with the offering increasing from the previous roughly $60 million. Management says the oversubscribed bought deal is a key milestone for the company as it looks to expand its operations ahead of Canada’s roll-out of ingestible cannabis this fall.

Macdonell estimates the deal leaves LABS with about $90 million cash on its balance sheet and says that Health Canada’s recent release of the finalized regulations for ingestibles could pave the way for MediPharm providing more information regarding its white label extraction deals with Canadian licensed cannabis producers.

“The financing combined with a pending $20-million debt facility gives LABS access to considerable capital that could be deployed in the near to medium term. Furthermore, the clarity on regulations clears a hurdle for the signing of new white labeling agreements. In our view, these catalysts could move LABS shares higher and bring its valuation closer to that of the traditional LPs,” says Macdonell.

Macdonell says that LABS is trading at an attractive valuation of 10x his calendar 2020 EBITDA estimate compared to Canadian LPs which trade at over 20x EBITDA and he says that the discount should narrow as the company executes on its growth initiatives.

Due to the dilution coming from the bought deal, Macdonell has dropped his target to $7.75, which represents a projected return of 43.0 per cent at the time of publication. Macdonell thinks that LABS will generate fiscal 2019 revenue and EBITDA of $118.4 million and $29.3 million, respectively, and fiscal 2020 revenue and EBITDA of $223.3 million and $71.3 million, respectively.

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