Stifel GMP analyst Robert Fagan remains bullish on Colombian cannabis company PharmaCielo (PharmaCielo Stock Quote, Chart, News TSXV:PCLO) after its latest quarterly results.
In a May 1 update to clients, Fagan kept his “Buy” recommendation and C$4.00 target, which at press time represented a projected one-year return of 281 per cent.
Toronto-headquartered PharmaCielo, which operates a medicinal-grade and oil extracts cultivation and processing facility in Rionegro, Colombia, released its fourth quarter and fiscal year ended December 31, 2019, results on Thursday.
The company saw Q4 revenue of $657,000 compared to zero a year earlier and $130,000 in the third quarter with a quarterly net loss of $12.4 million. PCLO ended the year with cash and equivalents of
$13.7 million and total assets of $50.2 million.
In his commentary, CEO David Attard said while 2019 was successful in laying the groundwork for meaningful sales growth in 2020, PharmaCielo is still well-positioned to achieve its 2020 goals despite COVID-19-related disruptions.
“Our objectives this year are straightforward and achievable,” Attard wrote in a press release. “We plan to complete construction of, and increase production output at, our Phase I processing and extraction centre; expand our offering of extracted product to include broad and full spectrum oil; begin to take the necessary steps to prepare for further production expansion in 2021 to coincide with market demand; and most importantly generate significant growth in commercial sales through the year based on agreements in-hand as well as in the pipeline, to drive cash flow breakeven by the end of the year.”
Fagan judged the fourth quarter results as coming in-line with his expectations and he made a point of mentioning PCLO’s good cost control over the quarter in its production of CBD extract to a US-based customer at about $2.20 per gram. The end result was SG&A staying stable sequentially and adjusted EBITDA coming in at a loss of $5.3 million, in line with Fagan’s negative $5.5 million forecast.
The analyst said he was encouraged by better extraction costs per gram, an important feature as global average selling prices dropped significantly over 2019. PCLO should still be profitable with gross margins of 70 per cent for its extract business, said Fagan.
Fagan also noted PCLO’s shift in focus towards the less commoditized European Union market for extracts, pointing to the company’s expected shipment of 2,000 kg of CBD/THC extract to Germany in 2020 and a potentially favourable change in CBD regulations in the United Kingdom upcoming, which would create a future channel for PCLO.
On PCLO’s liquidity, Fagan estimates it at about $14 million currently, which he said should sustain the company for up to 12 months of operation even assuming zero revenues for that period.
“We expect PCLO’s sales development to remain in its infancy in 2020, due to challenges stemming from COVID, and weak US markets. This said, PCLO should be poised to capitalize on any rebound, having already achieved a globally competitive cost basis,” Fagan wrote.
Looking ahead, Fagan is forecasting fiscal 2020 revenue and EBITDA of $8.4 million and negative $13.2 million, respectively, and fiscal 2021 revenue and EBITDA of $93.2 million and $49.6 million, respectively.
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