CVE:PCLO has a huge upside, says Stifel

Cannabis company PharmaCielo (PharmaCielo Stock Quote, Chart, News TSXV:PCLO) is doing well to push through COVID-related obstacles, says Stifel GMP analyst Andrew Parthniou, who reviewed PharmaCielo’s new quarterly results in an equity research update to clients on Monday.

Toronto-headquartered PharmaCielo has operations in Rionegro, Colombia, and is focused on producing and selling medicinal-grade cannabis oil extracts and related products to international channels.

The company reported its second quarter 2020 financial results on Monday, ramping up to revenue of $1.2 million for the Q2 compared to $787,000 for the whole of 2019.

Operationally, the company said its negotiation rounds with contract growers over the second quarter led to its first external cultivation contract with a local grower, effectively expanding the company’s footprint by 32 per cent to 1.6 million sq ft. that its processing and extraction centre will begin accelerating during the third quarter 2020 and that it will initiate GMP certification during Q4, aiming at opening up its customer base and entering new markets next year.

“We are making steady progress and are backed by arguably one of the industry’s largest combination of cultivation, state-of-the-art processing and extraction facilities to produce a growing portfolio of value-added cannabis extract products. With meaningful revenue growth in the back portion of the year expected to drive cash flow positive exiting 2020, PharmaCielo is set to begin delivering meaningful shareholder value while becoming the input supplier of choice for leading brands,” said CEO David Attard in the company’s second quarter press release.

In his commentary, Partheniou called the Q2 numbers not very material considering the COVID-related supply chain challenges. Nevertheless, the $1.2 million in revenue compared to his $0.1-million forecast, while the company’s adjusted EBITDA loss of $4.4 million was a little more than his $4.1-million estimate. The analyst noted that gross margin was significantly better than expected at 50 per cent.

On securing the contract grower, Partheniou called it a sign of confidence in PCLO’s supply agreement pipeline that exists mainly in Europe and the US.

“We note that despite a challenged market in the US, management indicated its product quality and consistency is a major driver of differentiation in a market fraught with impure and mislabeled CBD products. Hence, we believe future sales opportunities could remain in the country for PCLO,” Partheniou wrote.

“While COVID-related safety measures are making for a difficult supply chain environment, PCLO continues to open logistical pathways for its products, growing revenues. We are encouraged by management’s confidence for sales conversion and believe that additional opportunities could arise upon EU-GMP certification expected in 2021,” he said.

“We note that with a proforma cash balance of ~$10 million including ITM securities, expected CAPEX of US$2 million remaining and a target of being cash-flow positive by early 2021, PCLO has the resources to execute on its strategic plan, in our view,” Partheniou wrote.

With the update, the analyst has maintained his “Speculative Buy” rating and $4.00 target, which at press time represented a projected 12-month return of 555.7 per cent.