Zenabis Global has an upside of 119%, says GMP Securities

Vancouver-based Zenabis on Tuesday announced that its Langley, BC, facility received on August 2 a cultivation license from Health Canada, effectively adding 9.9 tonnes of production capacity and bringing the company’s total annual licensed capacity to 42.8 tonnes. The new license increases the company’s licensed annual cultivation capacity from 32,900 kg to 42,800 kg, a bump of more than 30 per cent.

Along with its Langley facility, Zenabis has operations in Delta, Aldergrove and Pitt Meadows, BC, along with facilities in Atholville, New Brunswick, and Stellarton, Nova Scotia. The company uses the Zenabis brand name for the medical cannabis market while both Namaste and Blazery are branded for the adult-use rec market.

Zenabis CEO Andrew Grieve wrote in the news release related to the new license win that year-to-date, the Zenabis has increased its cultivation capacity more than eightfold on a design capacity basis. Grieve said that the receipt of the Langley license, which occurred less than one month after the point of submission, is itself “a testament to both the quality of our facilities and the strength of our regulatory team.” The company has also reiterated its expectation that its licensed capacity will increase to 131.2 tonnes by Q3 of this year.

Keywood says that the licensing is consistent with his timing expectations for the company and that the licensing progress strengthens his perspective on the company.

“In our view, the continued licensing progress for ZENA’s facilities helps de-risk our near-term forecasts. At 6.5x 2020 EBITDA, ZENA continues to trade well below most peers that average ~17x as a group,” said Keywood in a client update.

“ZENA recently refinanced $25 million in debt that was coming due in Oct. 2019, along with securing two pre-paid supply agreements for a combined $40 million. We see these developments as addressing $50 million in debt that was maturing in the near-term and providing capital for expansion goals of 131 tonnes by Q3/19. ZENA’s $40 million in pre-paid supply agreements included a $30 million arrangement with Tilray at an undisclosed but what is believed to be profitable pricing. The remaining $10 million was with Starseed Medicinal. We see these agreements as validation for ZENA’s product quality and it also aids in addressing a capital structure overhang with near-term debt maturities,” he writes.

Keywood says that ZENA shares currently trading near 52-week lows and at a valuation of 6.5x his 2020 EBITDA estimate, now is an “attractive entry point” with the company continuing to execute on its growth strategy. (ZENA’s 52-week high/low is $6.85 and $1.41.)

The analyst’s $3.25 target price represented a projected 119 per cent return on investment as of publication date. Year-to-date, ZENA is down 75.5 per cent as of Tuesday’s close.

About Zenabis Global by GMP Securities

ZENA aims to become one of the top cannabis producers in the industry with the third largest available production footprint. As part of the creation of ZENA, Bevo Agro and SunPharm merged through an RTO deal in Jan. 2019. Bevo is a plant propagation business (seed to seedling or young plant) that has monopolistic characteristics, good growth and a history of value creation. Bevo was founded by Jack Benne and his son Leo Benne who are Dutch horticultural experts with a 30+ year track record of consistently expanding a tough propagation business and Leo is now the Chief Growing Officer at ZENA. Bevo has minimal competition with its large scale in the highly seasonal business where plants are very vulnerable at the seed to seedling stage. Bevo services greenhouses, farms and wholesalers across the continent. Its main products are vegetable plants such as tomatoes, peppers, lettuce, and cucumbers together with other plants. We expect Bevo to contribute ~$35m in sales and $8m in EBITDA with what we estimate to be ~$100m in EV to ZENA, given the monopolistic characteristics and history of value creation.