Looking for a cheap cannabis stock? Try MediPharm Labs says PI

Looking for a cheap cannabis stock? Try MediPharm Labs (MediPharm Labs Stock Quote, Chart, News TSX:LABS), says PI Financial analyst Devin Schilling.

Schilling likes the progress made by MediPharm Labs, a cannabis extraction company which just announced a sales and manufacturing agreement in Australia. In an update to clients on Tuesday, Schilling reiterated his “Buy” rating and $8.75 target for LABS, which translated into a 12-month projected return of 76.8 per cent at the time of publication.

Toronto-based MediPharm on Wednesday announced that its subsidiary MediPharm Labs Australia has entered into an agreement with a licensed producer in Australia to purchase dried flower from the LP and to sell cannabis oil and other products. At this time, no details on the contract size were disclosed but management has said the deal has a 12-month term with options to extend.

“This is MediPharm Labs Australia’s first agreement for product sale since receiving our cannabis manufacturing licence just three months ago and further establishes MediPharm Labs as a leader in the emerging Australian and Asia-Pacific markets,” said Pat McCutcheon, CEO, MediPharm Labs, in a press release.

Schilling is taking the news as a positive for the stock.

“This announcement highlights the progress being made at MediPharm Labs Australia. MediPharm anticipates having their Australian facility completed before the end of 2019 with sales commencing in the first half of 2020 which we expect will initially be limited but has the opportunity to grow as the Australian medical cannabis market further develops,” the analyst said.

No reason for LABS to be a cheap cannabis stock, analyst says…

Schilling contends that LABS is a cheap cannabis stock because it is currently trading at a discount to its peers at 9.8x his fiscal 2020 EBITDA estimate versus its peer group average of 15x.

“This discount is not justified due to the fact that LABS ranks third in highest quarterly net revenue among all Canadian LPs, has generated positive EBITDA in every quarter since commencing sales and is the first Canadian LP to generate positive net income without any non-cash fair value adjustments being added back,” he writes.

Going forward, Schilling thinks that MediPharm will generate fiscal 2019 revenue and EBITDA of $137.1 million and $33.1 million, respectively, and fiscal 2020 revenue and EBITDA of $195.4 million and $59.0 million, respectively.

MediPharm, which just graduated to the TSE’s senior board at the end of July, last reported its quarterly earnings in early August where it posted second quarter revenue of $31.5 million, a 43-per-cent increase over the previous quarter, with adjusted EBITDA of $7.7 million, up 79 per cent sequentially. MediPharm’s Q2 gross profit was $11.3 million, a 65-per-cent sequential increase, while its cash balance as of June 30, 2019, was $72.7 million, up from $7.9 million six months earlier.

“Based on the strength of our business model and the effectiveness of our corporate strategies, we’ve become the first public Canadian extraction only company to deliver bottom-line earnings and do so while investing heavily in our sophisticated extraction and production platforms ahead of benefits realized,” said McCutcheon in a quarterly press release on August 12.

Currently trading in the high-$4.00 range, LABS is now up 180 per cent year-to-date.