A reduction in peer multiples combined with a market sell-off has PI Financial analyst Devin Schilling cutting his price target on Canopy Rivers (Canopy Rivers Stock Quote, News, Chart TSXV:RIV).
This morning, Canopy Rivers announced that its portfolio company TerrAscend Corp had signed a definitive agreement to acquire Pennsylvania-based cannabis cultivator Ilera. The company said Ilera is one of just five operators in that state to have a “superlicense” to process, grow and sell cannabis. TerrAscend said it plans to launch its own brands in the Pennsylvania market.
“TerrAscend’s rapid expansion in the U.S. has been driven by strategic, accretive acquisitions of quality operators with strong track records of success,” said Narbe Alexandrian, president and chief executive officer of Canopy Rivers. “We view the Ilera acquisition as another important step by TerrAscend as it grows its revenue-generating operations, expands its U.S. footprint in new states and continues to scale its global business operations.”
Schilling summarized the terms of the deal, offering that he believes this is a step forward.
“TerrAscend will pay total consideration of between US$125-$225M, in a combination of cash and TerrAscend shares. Ilera’s current revenue run-rate is over US$43M and is growing rapidly as the company had total sales of less than US$8M in 2018,” the analyst explained. “TerrAscend provides Canopy Rivers with important exposure to the rapidly developing US cannabis market. This acquisition, subject to regulatory approval, expands TerrAscend’s US footprint and is expected to meaningfully contribute post the transactions targeted close in the 4th quarter. TerrAscend represents the second largest contributor to our NAVPS estimate for Canopy Rivers as it accounts for $0.60 or ~14% of our total NAVPS estimate.”
Canopy Rivers Stock: Target cut to $8.00
In a research update to clients today, Schilling maintained his “Buy” rating but lowered his one-year price target on the stock from $9.00 to $8.00, implying a return of 195.2 per cent at the time of publication.
Schilling thinks RIV will post net income of negative $10.9-million on Total OI of $11.8-million in fiscal 2020. He expects those numbers will improve to net income of negative $3.58-million on Total OI of $16.2-million the following year.
The analyst explained that his target decrease came about due to the recent market sell of and a reduction in peer multiples.
“As of yesterday’s closing price, RIV’s market cap (fd) was $599M with $104M in cash, $144M of publicly traded investments, and $37M of private investments held at cost,” the analyst added. “This implies an EV of $314M for the ~$100M in total attributable EBITDA estimated from its private joint venture production assets not included above and represents a 3.1x multiple vs. the peer group average of 10x. This significant discount excludes any value for RIV’s existing royalty streams, which if included, would imply an even lower multiple.”
As pot stocks slog through a tough summer, Canopy Rivers is expanding its footprint.
On August 1, the company announced that it portfolio company Radicle Medical Marijuana had received approval from Health Canada for an expansion project management said would double its footprint, increasing capacity to 6000 kilograms per year.
Alexandrian compared the rise of Radicle to the craft brewing movement, describing it as “artisanal”. He said he believes the demand for this craft style bud is nowhere near ready to tail off.
Canopy River currently owns 22 per cent of Radicle, having first invested to years ago this month.
Shares of Canopy River closed Tuesday down 2.5 per cent to $2.70.