Following the company’s latest acquisition, GMP Securities analyst Robert Fagan is maintaining his “Buy” rating on The Supreme Cannabis Company (The Supreme Cannabis Company Stock Quote, Chart TSXV:FIRE).
On Wednesday, Supreme Cannabis announced it would acquire cannabis privco Truverra, which operates a five thousand square foot facility in Scarborough, for approximately $20-million.
“The recent introduction of Health Canada’s amended cannabis regulations creates a distinct opportunity for Supreme Cannabis to establish a leading position in the cannabis extracts markets. With the acquisition of Truverra, we secure a Toronto-based facility equipped to extract our high-quality inputs for concentrates and vaping liquids in the near-term,” CEO Navdeep Dhaliwal said. “Truverra’s operations also provide an additional entry point into Europe’s CBD wellness market, where Truverra Europe has successfully launched multiple CBD products in various jurisdictions. Truverra’s Canadian and European operations are managed by a senior leadership team with a wealth of experience manufacturing and launching products in highly regulated industries such as life sciences and pharmaceuticals.”
Fagan says the pickup seems pricey at first blush, but does offer a range of advantages.
“With limited visibility into the revenue generation of Truverra, assessing the valuation of the acquisition is difficult,” the analyst says. “While the $20m purchase price appears elevated, we believe this reflects several strategic benefits for FIRE. Currently, FIRE is using MediPharm Labs for extraction and commercialization of some products (KKE oils), which should allow for higher margin capture once production is internalized through Truverra. In addition, with Health Canada’s processing licence timelines requiring 12+ months, with Truverra FIRE should be able to bring extract-based products to market ~18 months sooner (likely CYQ1/19), promoting better market share capture opportunities and reinforcing brand recognition. This combined with the planned addition of a large ethanol extraction lab at FIRE’s Blissco facility should provide ample capacity to capitalize on strong expected demand for Cannabis 2.0 products.”
In a research “Flash” update to clients today, Fagan maintained his “Buy” rating and one-year price target of $7.25 on The Supreme Cannabis Company, implying a return of 79.7 per cent at the time of publication.
Fagan notes that there is also a European component to the acquisition.
“We view Truverra Europe as also providing a complementary fit for FIRE’s international platform, as Truverra should open European distribution channels for CBD oil produced at Medigrow in Lesotho,” he adds. “In particular, FIRE should be able to leverage Truverra’s existing UK distribution, to capitalize on an estimated ~$500m UK CBD market with low-cost product from Lesotho, potentially boosting Truverra Europe’s profitability.”