Heritage Cannabis Holdings is very undervalued, says PI Financial

PI Financial analyst Devin Schilling is staying bullish on Heritage Cannabis Holdings (Heritage Cannabis Holdings Stock Quote, Chart, News CSE:CANN).

The analyst says the cannabis extraction company is one of the most experienced outfits in the sector. In an update to clients on Tuesday, Schilling reiterated his “Buy” rating and $1.00 target price, representing a projected 12-month return of 150 per cent at the time of publication.

Vancouver-based Heritage is an extraction and value-added products company operating two licensed facilities, CannaCure and Voyage, and comprised of four operating subsidiaries, including Purefarma Solutions, which won the High Times Cannabis Cup and the Emerald Cup for its premium vapes and concentrates.

Heritage on Tuesday announced two new supply agreements with Weed Me Inc to purchase a bulk order of cannabis biomass and a right of first offer to secure future additional supply. Heritage says that it received the first bulk shipment from Weed Me during the last week of August.

“We are pleased to have Weed Me as a contracted supplier of cannabis biomass,” CEO Clint Sharples said in a press release. “Their ability to grow quality THC and CBD content cannabis which meets our high specifications contributes to our increased production schedule to meet our customer’s product expansion plans.”

Schilling says the We Meed biomass will likely be directed towards servicing Heritage’s vape pen agreement with cannabis company Cronos Group, a two-year term agreement with an option to extend with an annual potential contract value of $35 million. The estimate cost of Heritage sourcing the biomass for this agreement is expected to run to about $12 million, says Schilling, who rates Tuesday’s announcement of a new supply agreement with Weed Me as a positive for the stock.

“We continue to believe that Heritage’s extraction subsidiary (Purefarma) is one of the most experienced groups in the sector with over five years of extraction history. This head start has resulted in Purefarma becoming experts in its field which we believe will result in new contract wins in the near term,” writes Schilling.

The analyst, who launched coverage of the stock in June, has stated that his forecasts for Heritage remain unchanged, calling for fiscal 2019 revenue and EBITDA of $3.31 million and negative $6.3 million, respectively, and for fiscal 2020 revenue and EBITDA of $53.8 million and $11.3 million, respectively.

Schilling’s $1.00 target represents an EV/EBITDA multiple of 14x based on his fiscal 2021 estimates.

Earlier this year, Heritage announced it had entered into a letter of intent to acquire 30 per cent of Los Angeles-based Endocanna Health in a deal worth US$3 million in a combination of cash and shares. Endocanna has developed a test which uses a home-based saliva collection kit to identify clinically relevant genetic variants related to cannabinoid receptors and metabolism for an individual, the aim being to help people formulate decisions on personal cannabinoid dosage.

“By utilizing the science-based EndoDNA process, we will be better able to assist patients with selecting and dosing by developing formulations that address the unique pharmacogenomics of individuals. This will provide an individualized, customizable approach that will help patients understand the link between cannabinoids and their health and assist them in product selection and dosing,” said Dr. Chris Spooner, chief science officer for Heritage Cannabis.