GMP Securities analyst Justin Keywood has practically nothing but praise for cannabis LP Zenabis Global (Zenabis Global Stock Quote, Chart, News TSX:ZENA), which he thinks could be a top-five producer in Canada.
Reflecting on the company’s just-released quarterly financials, Keywood has maintained his “Buy” rating and $3.25 target in an update to clients on Wednesday, with the target representing a projected return of 121.1 per cent at the time of publication.
Vancouver-based Zenabis, which operates facilities in New Brunswick, Nova Scotia and BC, released its second quarter ended June 30, 2019, results on Wednesday, reporting the cultivation of 2,473 kg of dried cannabis over the quarter, exceeding the company’s earlier forecast by 40 per cent. Management say Zenabis remains on track to get to an annual cultivation capacity of 143,200 kg under its existing capital program.
“We executed at or above plan in the second quarter and, in so doing, continued to make significant progress towards our goal of becoming one of the largest licensed producers of medical and adult-use recreational cannabis in Canada,” said CEO Andrew Grieve in a press release.
“In the second half of 2019, we expect to cultivate approximately 16,100 kg and 1,650 kg of dried cannabis from Zenabis Atholville and Zenabis Langley (Site A – Part 1), respectively. Given our increasing cultivation forecast profile, we expect to achieve meaningful quarter-over-quarter revenue growth through the remainder of the year,” he writes.
Zena’s Q2 generated total gross revenue of $26.5 million, up 78 per cent quarter-on-quarter but slightly under Keywood’s estimate of $27.8 million. Q2 included an adjusted EBITDA loss of $6.3 million which compared to Keywood’s negative $5.5 million. The analyst wrote that he was encouraged by ZENA’s flat opex and that the company appears to be on the path to meet his expectations.
“We see ZENA as becoming a top five Canadian LP with its shares substantially undervalued at ~7x EBITDA, in part from a complicated capital structure that is being cleaned up. We spoke to several of ZENA’s partners, including government contacts at the distribution level in different provinces and the feedback was unanimously positive. Contacts described ZENA’s quality of operations as one of the best when compared to other LPs and spoke to the high ethics of management and solid relationships in place. This bodes well in an industry going through rapid transition, where we see competitive advantages in high quality producers with strong reputations and partnerships,” writes Keywood.
The analyst details a number of features that Zenabis has going for it, based on his observations, including quality facilities, a team of best-in-class operators, a history of innovation in growing processes and automation, its capacity to expand, high product quality and a management praised for its high integrity and ethics.
Keywood thinks that Zenabis will generate fiscal 2019 EBITDA of negative $19.2 million on revenue of $95.4 million and fiscal 2020 EBITDA of $51.1 million on a top line of $262.1 million.
Last week, Zenabis announced that it had received a cultivation license from Health Canada for its Langley, BC, facility, thereby adding 9,900 kg of annual cultivation capacity. The company reported that construction at a second Langley facility representing a potential 86,200 kg of capacity is currently ongoing.