With expansion plans at a total run-rate of 131,200 kg going into 2020, Zenabis Global (Zenabis Global Stock Quote, Chart TSX:ZENA) has the opportunity to become a top five supplier in the Canadian cannabis market, according to GMP Securities analyst Justin Keywood, who on Thursday launched coverage of ZENA with a “Buy” recommendation and 12-month target price of $3.25 per share.
Formed as a merger between Bevo Agro and SunPharm in a reverse takeover in January 2019, Zenabis Global takes on Bevo’s plant propagation business, good growth and history of value creation, says Keywood.
“We see ZENA as becoming a top five Canadian LP with its shares substantially undervalued at ~7x EBITDA, in part from a complicated capital structure. We spoke to several of ZENA’s partners, including government contacts at the distribution level in different provinces and the feedback was unanimously positive. Contacts described ZENA’s quality of operations as one of the best when compared to other LPs and spoke to the high ethics of management and solid relationships in place. This bodes well in an industry going through rapid transition, where we see competitive advantages in high quality producers with strong reputations and partnerships,” writes Keywood.
BC-based ZENA currently has licensed production capacity of 23,100 kg but with submitted amendments to increase its run-rate to 32,900 kg in the third quarter of this year. The company’s expansion plans have a total run-rate increasing to 131,200 kg going into 2020 and include an option to expand capacity further to 478,800 kg.
Currently trading in a $1.50-$1.70 range, Keywood thinks ZENA is oversold.
“Although a short-term financing overhang exists, we see the stock as being oversold for the current capital structure with a clear path to our $3.25 target. Exceptional partner feedback also lowers the risk to our investment thesis and we see a compelling entry point at ~7x EBITDA. Our $3.25 target price assigns a 12x EBITDA multiple to ZENA’s propagation business and 15x EBITDA multiple for cannabis with conservative assumptions,” Keywood writes.
The analyst thinks ZENA will generate fiscal 2019 revenue and EBITDA of $100.1 million and negative $9.4 million, respectively, and fiscal 2020 revenue and EBITDA of $261.6 million and $51.5 million, respectively. His $3.25 target represents a projected return of 98.2 per cent at the time of publication.
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