Cannabis investment platform Canopy Rivers (Canopy Rivers Stock Quote, Chart, News TSXV:RIV) continues to get a “Buy” rating from GMP Securities analyst Justin Keywood.
But on Tuesday, the analyst reviewed RIV’s first quarter results, saying that although he’s dropping his target price he still sees a fair and compelling investment case in the company.
Like the broader cannabis sector, Canopy Rivers has seen its share price drop in recent months, falling from a high of $6.14 on February 1 to where it has been trading over the last two weeks in the mid-$2.00 range. Toronto-based Canopy Rivers, which has a portfolio of currently 18 companies including main assets PharmHouse, Canapar and Vert, creating what it calls an “ecosystem of complimentary cannabis operators,” released its fiscal Q1 2020 ended June 30, 2019, on August 27.
RIV reported a net loss of $3.0 million compared to a loss of $6.6 million for last year’s Q1. The loss amounted to two cents per diluted share, with operating income up to $2.7 million from $744,000 a year prior.
In the press release, president and CEO Narbe Alexandrian spoke of the company’s new investments in plant sciences and cannabis over the Q1.
“In addition to our new investments, as lifecycle investors, it was also rewarding to see so much positive news coming from our portfolio companies this quarter. From PharmHouse entering into a significant supply agreement with Canopy Growth to TerrAscend becoming, to our knowledge, the first and, so far, only cannabis company with sales in Canada, the US, and the European Union, our portfolio companies were busy creating significant value,” wrote Alexandrian.
In his update to clients, Keywood said that because most of RIV’s assets are private there is limited financial visibility on the progression of these investments, posing a challenge in valuing the stock. He noted that the company has disclosed an attributable 2020 EBITDA for PharmHouse, Canapar and Vert, with the prior guidance calling for $105 to $130 million but now dropping to $93 million due to the removal of Canapar on account of regulatory uncertainty.
Keywood pointed out that Rivers’ investments go beyond just financial considerations by providing consulting, strategic relationships and a collaborative system to share best practices.
“We spoke to several of Rivers’ portfolio of companies and received very strong feedback from entrepreneurs, which is important in our view to drive greater value. Management also has expertise in private equity and diversified M&A services, supporting the vision. Overall, we see Rivers as offering a diversified investment opportunity in the Cannabis area,” writes Keywood.
Keywood’s “Buy” rating now comes with the reduced target price of $5.00 per share, down from $8.00 and representing a projected 12-month return of 121.2 per cent at the time of publication. The analyst explains his reasoning as follows.
“We changed our valuation method by assigning a discounted EBITDA multiple of ~7x for guided operations, utilizing a 2.0x NAV multiple for 15 private investments at cost, while adding the publicly traded investments, along with Rivers’ cash balance. Overall, this equates to a $5.00 share price or ~120 per cent upside. Our prior $8.00 target was based on 2.0x NAV for the whole business. We will continue to monitor Rivers’ portfolio of assets, where evidence of financial progression could imply higher multiples and share price,” he writes.