The CBD market is taking off and Abacus Health Products (Abacus Health Products Stock Quote, Chart, News CSE:ABCS) is a great way to put some of that exposure into your portfolio.
That’s according to Beacon Securities analyst Doug Cooper who launched coverage of the stock on Tuesday with a “Buy” rating and C$15.00 target price, saying that investors might also be interested in Abacus as a possible takeout target.
Originally a subsidiary of Aidance Skincare & Topical Solutions, Abacus was spun out during a reverse takeover on January 30, 2019, with the former parent company now owning about 7.4 per cent of the shares and still acting as Abacus’ primary third-party manufacturer.
Abacus makes pain relief products for two channels, under the brands CBDCLINIC, marketed for professional practitioners including chiropractors, massage therapists and naturopaths, and CBDMEDIC, marketed to the consumer.
Abacus has products currently available in 20 retailers and 7,000 stores in the US, with room for growth through those 20 retailers who have a combined footprint of about 35,000 stores. On the spokesperson front, Abacus has signed relationships with Gillette Stadium and Patriot Place and announced this past August a relationship with future NFL Hall of Famer Rob Gronkowski, an “exceptional” win for Abacus, says Cooper.
“We can think of no better endorsement for a pain-relief cream than a football star whose career was cut-short by injuries and who claims that Abacus’ products manage his pain better than anything else he has ever tried,” writes Cooper.
Overall, the analyst sees Abacus as hitting a market sweet spot in addressing pain management and riding the CBD wave now hitting the United States and Canada.
Cooper mentions that according to the Brightfield Group, 2019 CBD sales should hit $5 billion, a 700-per-cent growth over 2018, and run to $24 billion by 2023, representing a 48 per cent CAGR.
On the pain management front, the analyst points to Allied Market Research which estimates that topical pain relievers will make up a market worth $14 billion by 2025, driven by an aging population. Moreover, Cooper says that Abacus has a competitive advantage over alternatives like Icy Hot and Bengay in the addition of CBD to extend the duration of therapeutic benefits of FDA-approved active pharmaceutical ingredients like menthol and camphor.
Further, Cooper says that Abacus’ novelty within the pain relief space will make it an acquisition target, estimating a take-out value of between C$17.50 and C$35.00 per share based on comparable strategic acquisitions at 5x-10x revenue.
“As consumers’ preference for longer lasting, non-opioid, therapeutic benefits to combat pain is seen at the cash register, we believe that Abacus will not only garner attention from investors who will assign a higher multiple to a growing revenue/EBITDA base but also from such pharma/CPG companies who would likely pursue an acquisition strategy to enter the CBD enhanced pain/skincare market, with Abacus being the prime target,” Cooper writes.
Looking ahead, Cooper thinks that ABCS will generate fiscal 2019 revenue and adjusted EBITDA of $16.1 million and negative $15.4 million, fiscal 2020 revenue and adjusted EBITDA of $51.5 million and negative $5.0 million, and fiscal 2021 revenue and adjusted EBITDA of $112.5 million and $22.5 million.
Valuation-wise, the analyst says that Abacus’ peer group within the topical pain relief market trades at about 4.3x fiscal 2020 sales forecasts and that a 4.3x multiple on an estimate run rate of $75 million implies a target of C$15.00, which also represents a 15x multiple of his fiscal 2021 EBITDA forecast.
At press time, Cooper’s C$15.00 target represented a projected return of 134 per cent.