PharmaCielo could add “significant growth” through M&A, GMP says

Cannabis company PharmaCielo (PharmaCielo Stock Quote, Chart TSXV:PCLO) has just announced its intent to acquire CBD products company Creso Pharma, a deal which would offer a number of strategic benefits for PCLO, says analyst Robert Fagan of GMP Securities.

In an update to clients on Friday, Fagan reiterated his “Buy” recommendation and target price of C$12.00 for PCLO.

PharmaCielo, whose principal operation is the wholly-owned subsidiary PharmaCielo Colombia Holdings S.A.S., announced on Thursday the intended acquisition of Creso Pharma, an Australian medicinal cannabis company that carries out research, development and production of CBD products for humans and pets and owns a Canadian licensed producer, Mernova Medical. The AUD$122-million deal would see PharmaCielo pay $0.63 per Creso Pharma share, representing a 50-per-cent premium over the closing trading price on May 31, 2019, a price that Fagan judges to be reasonable.

Fagan says that the acquisition would open up new distribution channels for PCLO and that PCLO could boost Creso’s margins by about 50 per cent by replacing their wholesale CBD purchases with internal production. The analyst also sees accelerated penetration through PCLO’s existing distribution channels through integrating Creso’s existing brands in Mexico and Italy, where demand is more focused on finished products.

“Strategic M&A activity was not previously a tenet of our investment thesis for PCLO. However, in light of the Creso acquisition announcement, this suggests M&A could emerge as a more significant growth vector for the company going forward,” says Fagan.

The analyst has added Creso’s numbers to his forecasts for PCLO, assuming a transaction closing date of Q3 2019 and with revenue contribution coming in Q4. Creso is projected to generate approximately $8 to $9 million of revenues in 2020, while PCLO’s EBITDA for 2020 gets decreased slightly to reflect Creso’s SG&A addition.

Fagan is now calling for fiscal 2019 consolidated sales and EBITDA of $4.2 million and negative $15.9 million, respectively, and fiscal 2020 consolidated sales and EBITDA of $70.0 million and $21.8 million, respectively. (All figures in US dollars unless otherwise noted.) Fagan’s C$12.00 target represents a projected return of 67.1 per cent at the time of publication.