GMP Securities analyst Robert Fagan says that the recent termination of a proposed acquisition by cannabis oil extraction company PharmaCielo (PharmaCielo Stock Quote, Chart, News TSXV:PCLO) is disappointing but doesn’t change his investment thesis on PCLO. In an update to clients on Wednesday, Fagan restated his “Buy” rating while dropping his target price from C$12.00 to C$9.00 on the back of the termination.
PharmaCielo shares closed up by more than five per cent on Wednesday as the markets reacted to news that the deal to purchase medical cannabis company Cresco Pharma had been terminated. Announced in June of this year, the deal was reportedly nixed after Cresco Pharma received a negatively revised fairness opinion last Friday, with PCLO then saying on Tuesday that Cresco’s Board could no longer support the proposed acquisition in its current form. Since PCLO did not intend to increase the consideration offered, the agreement was terminated.
“Our team has made significant strides over the past several months on an organic basis, expanding cultivation and production with a best in class cost structure, as well as growing international sales. As we near completion of Phase I of our processing centre, which will be capable of producing over 24 metric tonnes of refined cannabis oil capacity per year, we are ramping up sales efforts. We are well-positioned to grow our business and the progress made over the past several months has set the Company up for a strong close to 2019 and solid growth in 2020,” wrote PharmaCielo CEO David Attard in a press release.
Fagan noted that the termination doesn’t trigger any break fees from either party but that CPH will now reimburse a loan of C$3.6 million to PCLO.
“While PCLO’s organic growth prospects remain strong, we believe the company will unfortunately forgo some strategic benefits from the CPH deal termination,” writes Fagan.
“We had expected CPH’s existing sales channels in the UK and EU to open new distribution opportunities, while also possibly accelerating PCLO’s progression up the value chain by leveraging CPH’s line of finished CBD products. We also viewed CPH’s LP operation in Nova Scotia as providing access to Canada’s market, while offering optionality to justify the issuance of THC production quota from Colombian regulators, combined with a pathway to global medical markets,” he writes.
At the same time, the analyst is upbeat on PCLO, noting that the company recently achieved a key organic growth objective, namely, forging a path into the US CBD market through a supply agreement with General Extract. The agreement allows PCLO access to the world’s largest addressable market for CBD, one where the company can leverage its low-cost competitive advantage, Fagan says.
“As the first Colombian LP to reach this milestone, this reassures us of managements’ ability to execute on its future distribution opportunities for CBD globally,” he writes.
The analyst has reduced his forecasts to account for the loss of the expected contribution from Cresco Pharma. Fagan is now expecting fiscal 2019 revenue and EBITDA of $3.1 million and negative $16.1 million, respectively, and fiscal 2020 revenue and EBITDA of $61.3 million and $15.1 million, respectively. (All figures in US dollars unless where noted otherwise.)
Fagan’s new C$9.00 target represented a projected return of 190.3 per cent at press time.
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