Rubicon Organics is a buy, says Mackie Research

With a significant demand for organic cannabis products in Canada and the United States and only two other organic producers in the Canadian Market, BC-based Rubicon Organics (Rubicon Organics Stock Quote, Chart, News CSE:ROMJ) is well-positioned to capitalize, says Mackie Research Capital Corporation analyst Greg McLeish.

The analyst initiated coverage of the stock on Monday with a “Buy” rating and $4.00 target price, representing a projected return of 111 per cent at the time of publication.

Cannabis licensed producer Rubicon owns a 125,000 sq ft hybrid greenhouse in Delta, BC, as well as a 40,000 sq ft hybrid greenhouse in Washington State which is currently leased to a state-licensed operator applying Rubicon Organics’ proprietary organic cultivation methods. The company also has exclusive licensing rights in Washington for the lifestyle and cannabis brand Cookies.

The company’s Washington tenant, Diesel Propagation Inc, a Tier-3 licensed Tenant, completed its first commercial scale harvest of organic cannabis in April, 2019. The company reports that the Washington facility is now fully planted and is being harvested on a bi-weekly basis.

Rubicon expects its first harvest at its Canadian facility to be scheduled for the current month of October, after it received organic certification from the Fraser Valley Organic Producers Association in July of this year.

“We are excited to have selected our first commercial crop for cultivation based on the results of extensive R&D work and pilot harvests, which tested the expression of our unique genetic library when grown in combination with our organic fertilization and integrated pest management systems,” said Jesse McConnell, Co-founder and CEO of Rubicon Organics, in a press release on June 20. “We look forward to announcing our brand portfolio, innovation pipeline and launch strains in the near future and to launching our super-premium organic brands to Canadian consumers this fall.”

In his coverage launch, McLeish says that there is significant demand for organic cannabis products in Canada and Europe, reporting that over 47 per cent of Canadian cannabis consumers prefer organically grown products, while a third of polled Americans said that they would prefer to buy organic cannabis products and would be willing to pay 50 to 100 per cent more for such products.

“Canada is continuing to develop a world class cannabis industry and companies operating in the sector are just in the early stages of growth. As a result, historical trading patterns are not a good proxy for establishing appropriate valuation multiples. We forecast that the majority of companies operating in the cannabis sector will not experience material revenue or earnings growth until the latter half of 2019. As a result, we value companies based on our financial projections through 2021,” McLeish writes.

“Over the last year, companies operating in the Canadian cannabis industry have been trading between 10x to 15x 2020 EV/EBITDA and we believe this is a fair multiple for this industry. We view Rubicon as an emerging player in the cannabis industry and as a result we are applying a 10x EV/EBITDA multiple to value the company,” he says.

McLeish thinks that Rubicon will generate fiscal 2019 revenue and EBITDA of $631,000 and negative $5.0 million, respectively, fiscal 2020 revenue and EBITDA of $40.4 million and $8.2 million, respectively, and fiscal 2021 revenue and EBITDA of $60.1 million and $20.2 million, respectively.