Medipharm Labs’ deal with Cronos Group gets thumbs up at PI

Cannabis extraction company MediPharm Labs (MediPharm Labs Stock Quote, Chart, News TSX:LABS) just signed a new multi-year contract with Cronos Group, a move which analyst Devin Schilling of PI Financial calls a nice win for MediPharm.

In a corporate update to clients on Friday, Schilling reiterated his “Buy” recommendation and $8.75 per share target price, representing a projected one-year return of 73.6 per cent at press time.

MediPharm announced on Friday a new manufacturing agreement for the filling and packaging of vaporizer devices, subject to approval by Health Canada, for Cronos Group, with MedPharm to provide high-quality formulated concentrate, labelling and packaging services for Cronos’ adult-use brand, COVE.

The initial term of the agreement is for two years with an option for renewal, with the contract size not yet disclosed.

The deal marks the second collaboration between MediPharm and Cronos, after a multi-year private label bulk resin supply agreement and a cannabis concentrate program agreement signed in May 2019.

“On the eve of legalization of concentrates products in Canada, we are delighted to add Cronos Group, to our expanding turnkey white-label platform,” said Pat McCutcheon, CEO of MediPharm Labs, in a press release.

“By leveraging our specialized expertise, technology and industrial scale vape filling capabilities, we will assist Cronos Group in delivering high quality, purity assured and Health Canada approved, derivative products further advancing their industry leading reputation and enhancing the supply chain in this important new category.”   

In his update, Schilling estimates the deal to add about $15 million in additional revenue for LABS starting in fiscal 2020.

“This incremental contract with Cronos is a nice win for MediPharm’s growing white-label platform. We note that this is the second collaboration between the companies highlighting MediPharm’s strong execution to-date. Providing filling and packaging services for vape devices in-house could lead to securing Cronos as a long-term bulk oil purchaser,” writes Schilling.

The analyst notes that Heritage Cannabis was recently selected through a similar contract with Cronos, with that contract having an annual potential value of about $35 million, and while Schilling says that MediPharm’s combined contract size with Cronos for bulk resin supply and filling and packaging is larger than Heritage’s, the new incremental portion will be smaller, hance the $15 million estimate.

Looking ahead, Schilling has made no changes to his fiscal 2019 revenue and EBITDA numbers, calling for $137.1 million and $33.1 million, respectively, while his fiscal 2020 revenue and EBITDA are now $209.3 million and $63.0 million, respectively (previously $195.4 million and $59.0 million, respectively).

The analyst’s $8.75 target represents an EV/EBITDA multiple of 17x based on his fiscal 2020 estimates (previously 18x). MediPharm, which graduated to the TSX from the Venture Exchange two months ago on July 29, has been a strong performer in 2019, gaining 172 per cent in value since the start of the year. LABS last presented its quarterly financials on August 12, where it recorded $31.5 million in revenue, a 43 per cent sequential increase, and adjusted EBITDA of $7.7 million, up 79 per cent from the previous quarter. Its cash balance as of June 30, 2019, was $72.7 million.