CNSX:CANN has tons of upside, says PI Financial

PI Financial analyst Devin Schilling says to expect a lower top line from Heritage Cannabis (Heritage Cannabis Stock Quote, Chart, News CSE:CANN) in its upcoming quarterly report.

Schilling issued an update to clients Wednesday in which he maintained his “Buy” rating, saying the company is well-positioned to benefit from its branded products over the long term.

Toronto-based Heritage Cannabis owns two licensed subsidiaries, Voyage Cannabis and CannaCure, along with an extraction business in Purefarma Solutions and a Medical Services Division.

The company is expected to report its second quarter results next Tuesday, after a Q1 delivered in late March showed sales of $3.56 million and an EBITDA loss of $2.26 million and EPS of negative $0.01 per share. At the time, management had called for positive cash flow from operations to come by Q3 of this year. Schilling said industry-wide softness is likely to impact Heritage’s numbers over the near term, with the analyst calling for a Q2 top line of $2.9 million, down 28 per cent sequentially, and an EBITDA loss of $0.7 million.

The consensus forecasts are for revenue and EBITDA of $6.4 million and $0.2 million, respectively.

“We expect a slowdown in activity levels related to the Cronos vape pen contract due to industry headwinds and the COVID-19 pandemic. On March 18, Heritage temporarily adjusted production to one shift per location per day as a risk mitigation strategy,” Schilling wrote.

“As of last quarter CANN had two customers accounting for 89 per cent of revenue highlighting high customer concentration and the need to further diversify revenue sources,” Schilling said.

The analyst noted that Heritage may advance an additional roughly $1.8 million from its loan agreement with Trichome since it has now met the condition of receiving a Health Canada sales license. Heritage ended its Q1 with $9.3 million in cash and short-term investments and working capital of $14.8 million.

For now, Schilling has left his estimates unchanged and is calling for fiscal 2020 (year end October 31) revenue and EBITDA of $34.0 million and $3.8 million, respectively, and fiscal 2021 revenue and EBITDA of $93.5 million and $22.8 million, respectively.

The analyst reiterated his 12-month target of $0.60 per share, which at press time represented a projected return of 329 per cent. Schilling’s target represents an EV/EBITDA valuation of 11x his 2021 estimates, which he says is in line with his cannabis equities peer group.

Last week, Heritage announced the launch in July of its Pura Vida brand vape cartridges in BC, Alberta and Manitoba. The company said in its press release that Pura Vida is an award-winning legacy cannabis brand whose vape oils are processed by Heritage extraction subsidiary Purefarma Solutions.

“Our Pura Vida branded products are being launched at a price that consumers have been demanding and are only the first of a portfolio of brands and products being launched by us in the coming months,” said Chris Pearson, VP Sales and Marketing of Heritage, in a press release.

“As consumer preferences have been trending toward high-value products, vertically integrated companies like Heritage can produce products that maximize margin performance, without sacrificing the quality of the offering,” Pearson said.