Although the new capital structure adds risk to the name, GMP Securities analyst Justin Keywood has faith in Canadian cannabis company Zenabis Global (Zenabis Global’s Stock Quote, Chart, News TSX:ZENA) and its ability to execute.
The analyst issued a corporate update to clients on Thursday, reaffirming his “Buy” rating and $3.25 target for ZENA.
Vancouver-based Zenabis on Wednesday announced $25 million in new debt financing which matures on June 30, 2020, and carries a 14-per-cent interest rate, with the right to pre-pay the debt at any time. The company will be using the funds to complete the expansion of its facilities, aiming for an annual design capacity of 143,000 kg of dried cannabis.
“The complicated debt financing announcement comes at an unfavourable time in the Cannabis industry with a general correction taking place. However, we do not see the financing as materially affecting our investment thesis on ZENA,” writes Keywood.
“The new debt financing gives ZENA more time and surplus cash to complete its build out of the Langley facility in bringing expected license capacity to 143 tonnes going into 2020. ZENA has also conveyed having one of the lowest cultivation costs in the industry at $0.50 per gram for Langley and $0.78 at Atholville. This could position ZENA as a top five Canadian LP with the lowest cultivation costs. Further, we are comforted with the exceptional partner feedback received on ZENA from provincial distributors and partners, which we put high value in for an industry undergoing rapid transition,” he writes.
Keywood says recent sector weakness and a 25-per-cent decline in Zenabis Global’s stock over the past three months now gives investors an opportunity to buy into what he thinks could be a top five licensed producer in Canada, although he cautions that investor patience will likely be needed as the company moves forward on its buildout.
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. The analyst’s $3.25 target translates into a projected 12-month return of 188 per cent at the time of publication.
Last week, Zenabis announced its second quarter fiscal 2019 results for the period ended June 30, 2019. The company posted gross revenue of $26.5 million, up 78 per cent quarter-on-quarter but a touch below Keywood’s $27.8 million estimate. For earnings, the Q2 generated an adjusted EBITDA loss of $6.3 million, which was larger than Keywood’s estimate of negative $5.5 million.
With the Q2 release, Zenabis’s management revised its annual production capacity estimate for its Atholville, New Brunswick, facility from 34,300 kg to 46,300 kg, bringing the company’s total licensed cultivation capacity to 54,000 kg from 42,800 kg.
“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 on August 14. “Notably, the buildout and completion of our growing facilities has progressed generally on time and on budget.”