Zenabis Global is an undervalued pot stock, GMP says

Shares of licensed cannabis producer Zenabis Global (Zenabis Global News, Stock Quote, Chart TSX:ZENA) are down considerably over the first half of 2019 but GMP Securities analyst Justin Keywood is staying bullish on the stock, saying two recent refinancing announcements bode well for the company’s prospects.

Vancouver-based Zenabis on Tuesday announced the refinancing of $25 million in debt that was coming due and also announced a $30-million non-dilutive financing and supply agreement with Tilray. Essentially a pre-payment for product, the latter will see ZENA delivering monthly dried cannabis to High Park, whose parent company is Tilray, starting in October 2019.

Zenabis CEO Andrew Grieve says that the agreement significantly reduces the need for potential further draws on ZENA’s $60-million unsecured convertible debenture.

“This Supply Agreement demonstrates the confidence of high-quality counterparties in our ability to produce consistent, premium cannabis product and we are looking forward to fulfilling our commitments to High Park, as well as to our provincial counterparties and the communities in which we operate,” said Grieve, in a press release.

Keywood says the Tilray deal attests to the quality of Zenabis’ product.

“We see ZENA as addressing the upcoming refinancing of ~$50 million due in October 2019 with these material announcements, while reducing the potential of utilizing an open convertible debenture, seen as an overhang on the stock,” said Keywood in a client update on Tuesday.

“The Tilray agreement also further validates ZENA’s quality of products while highlighting operational excellence and growing expertise with production goals on track. More broadly, we see the potential for ZENA to become a top five Canadian LP supplier with an expected 131 tonnes in licensed production capacity going into 2020. Our due diligence and solid partner feedback supports this goal and we expect valuation to continue to re-rate higher,” said Keywood.

The analyst says despite the stock’s recent jump, ZENA’s valuation is still well below its peers at 9x 2020 EBITDA versus its peer group average of 20x. Keywood is maintaining his “Buy” rating and $3.25 target price, which represents a projected return of 61 per cent at the time of publication.

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