Supreme Cannabis has a 221 per cent upside, says PI Financial

Supreme Cannabis (Supreme Cannabis Stock Quote, Chart, News TSX:FIRE) hit an upbeat note with its latest quarterly earnings, according to analyst Jason Zandberg of PI Financial, who provided an update to clients on Wednesday which reiterated his “Buy” rating and $4.50 target for FIRE, representing a projected 12-month return of 221 per cent at the time of publication.

Toronto-based Supreme Cannabis released its fourth quarter ended June 30, 2019, and fiscal year results on Tuesday, featuring net revenue up 436 per cent year-over-year and 90 per cent sequentially to $19.0 million. EBITDA came in at $3.2 million versus a loss of $0.3 million last year, while EPS was $0.00 versus $0.00 a year earlier.

EBITDA margin was 17 per cent, with the Q4 representing the first positive EBITDA quarter.

In the company’s press release, CEO Navdeep Dhaliwal touted the company’s disciplined approach as well as the success of 7Acres, the company’s core recreational flower brand.

“With strong confidence in our core business, we began fiscal 2020 with two accretive acquisitions that expanded our addressable markets, provided valuable licensed operating assets and focused expertise,” Dhaliwal said. “As we integrate these businesses and realize further efficiencies from our scaled 7ACRES operations, we expect all of our brands to meaningfully contribute to the revenue we have forecasted for fiscal 2020.”

Zandberg says that Supreme’s Q4 net revenue was in line with his expectations while the EBITDA of $3.2 million beat his $1.1 million forecast, even as Supreme had released guidance for the quarter just a month ago. The analyst noted that the jump in revenue from a month earlier was due to the company’s continued transition of sales from legacy wholesale contracts to recreational sales channels (rec sales were up 51 per cent sequentially).

“While most LPs have been experiencing price compression across provinces, 7ACRES continues to command a higher price point at a range of +$6.50/gram due to the quality of its premium products. Supreme also recently negotiated with a number of provincial wholesalers to increase pricing due to strong demand for high quality flower,” writes Zandberg.

The analyst notes Supreme’s production ramp, evidenced by the company’s inventory which at the quarter’s end grew by 167 per cent to $22 million. As well, Zandberg commented on a mechanical failure experienced at Supreme’s 7Acres facility, saying that while it impacted 10,000 sq ft of production space, the incident was isolated and the affected grow rooms have now been recommissioned.

Going forward, Supreme’s management has maintained its guidance on net revenue for fiscal 2020 of between $150 million and $180 million while stating that EBITDA will be positive on the aggregate for FY20.

For his part, Zandberg is upping his forecast, now calling for sales of $150.9 million, $233.8 million for fiscal years 2020 and 2021 (previously $116.2 million and $193.4 million) and for EBITDA of $33.9 million and $64.1 million for fiscal years 2020 and 2021 (previously $34.0 million and $56.4 million).

His $4.50 target stems from an EV/EBITDA multiple of 25x based on his fiscal 2021
EBITDA (previously 24x). Supreme’s share price has had an up and down year so far, currently trading up six per cent year-to-date.