AltaCorp Capital analyst David Kideckel launched coverage of MediPharm Labs (MediPharm Labs Stock Quote, Chart, News TSX:LABS) on Sunday with an “Outperform” rating and one-year target of $7.50 per share.
Kideckel says MediPharm is poised to benefit from the increased global demand for cannabis extracts and cannabis derivative products as well as the ongoing gradual shift from dried flower to cannabis extract products.from the recreational, medical and pharmaceutical segments of the emerging cannabis industry.
Kideckel says MediPharm Labs benefits from being one of the early-movers in the extraction space as the first fully-licensed extraction-only company in Canada…
Cannabis extraction and processing company MediPharm operates five extraction lines at its Barrie, Ontario, facility (with a throughput of 300,000 kg per year of dried cannabis) as well as having an Australian extraction facility currently under construction through its 80-per-cent owned Australian subsidiary. The company generates revenue from two segments, a private label business consisting of wholesale bulk cannabis extract sales and a white label business consisting of high-quality cannabis extracts, filling services and national distribution of custom-formulated cannabis derivate products.
Kideckel says MediPharm Labs benefits from being one of the early-movers in the extraction space as the first fully-licensed extraction-only company in Canada.
“We believe that LABS will derive revenues through its wholesale sale of bulk cannabis extracts (private label), custom- formulation of products, processing, as well as the packaging of ready-to-sell cannabis- derivative products and APIs (white label). With this narrow focus, the Company gains exposure to a wide range of products, from bottled oils to vapeables, beverages, and pharmaceuticals. By leveraging that optionality and presence across product segments, LABS also gains exposure to a robust and diverse client base,” Kideckel says in his coverage initiation.
Founded in 2015, MediPharm has so far signed several private label and white label agreements in Canada, Australia and in Germany, a good sign, says Kideckel.
“These agreements provide a recurring source of revenue for the Company over multi-year periods. In our view, these multi-year agreements de-risk LABS’ operations and cash flows, and provide an excellent base upon which management can further deploy its long-term strategy,” he writes.
Last month, MediPharm announced a new manufacturing agreement with Cronos Group for the filling and packaging of vaporizer devices, subject to approval by Health Canada, for Cronos’ adult-use brand, COVE. The initial terms of the agreement are for two years with an option for renewal with the contract size yet to be disclosed.
Kideckel says he likes the company’s early profitability, which gives strong validation for MediPharm’s business strategy.
“LABS boasts the largest trailing twelve months revenue among its peers. The Company also achieved positive adjusted EBITDA and operating cash flow before working capital changes over the last two quarters. In our view, these results demonstrate the Company’s early successes in the still-nascent cannabis industry and validate its execution and business strategy to date,” says Kideckel.
The analyst expects that LABS will generate fiscal 2019 revenue and adjusted EBITDA of $138.8 million and $32.9 million, respectively, and fiscal 2020 revenue and adjusted EBITDA of $221.2 million and $74.4 million, respectively. The analyst’s $7.50 price target represents a projected return on investment of 90.4 per cent at the time of publication.