Take a pass on Supreme Cannabis, says Stifel GMP

The Supreme Cannabis Company (The Supreme Cannabis Company Stock Quote, Chart, News TSX:FIRE) reported strong earnings in its latest quarter but the results weren’t enough to move the needle for Stifel GMP analyst Andrew Partheniou who in an update to clients on Monday reiterated his “Hold” rating while dropping his target price from $0.30 to $0.15 per share.

Toronto-headquartered Supreme Cannabis, which owns a portfolio of cannabis companies, products and brands including 7ACRES, Blissco and Sugarleaf, announced on September 24 its fiscal fourth quarter 2020 financials for the period ended June 30, 2020.

Revenue of $9.5 million was stable sequentially while reported adjusted EBITDA of negative $4.2 million was a bit better than Q3’s loss of $5.0 million. The company said recreational sales volumes were up ten per cent from the previous quarter to 1,449 kg and its average selling price per gram for rec sales rose to $5.00, up 16 per cent from the third quarter.

Management said the slight dip in net revenue from $9.7 million to $9.5 million was due to the company’s shift in focus from the domestic wholesale channel to the rec channel, while looking ahead, FIRE said it “remains confident” in its ability to grow revenue over the near term and to reach profitability.

“Fiscal 2020 was an important transitional year for Supreme Cannabis where we streamlined our operations, reorganized our team, and expanded our portfolio of brands and products that will drive sustainable revenue growth,” said Beena Goldenberg, President and CEO, in a press release.

“Looking into 2021, we will continue to focus on efficiency throughout the organization. As we make progress towards our goal of becoming a premium cannabis CPG company, we look forward to continued strong engagement from cannabis consumers, growing our brand visibility and market presence, and accelerated revenue growth,” Goldenberg said.

On the Q4 numbers, the $9.5-million top line was better than Partheniou’s $8.3 million forecast, while Supreme’s adjusted EBITDA loss of $2 million (by the analyst’s estimation) was also better than his negative $4.2-million forecast as well as the consensus negative $3.1 million.

Partheniou said that although the company saw its rec channel sales grow by 27 per cent sequentially compared with the Canadian market average of 16 per cent, data from Headset on the core markets of BC, Alberta and Ontario in bricks and mortar stores showed FIRE’s market share dropping across the flower, pre-roll and vapes categories.

Partheniou wrote, “With a new CEO having taken control at the end of April, Q4FY20 is the first sign of FIRE’s improvement both on right-sizing the company and REC sales momentum. However, we note new store additions and new product introductions could have created a short-lived spike in sales, pointing to some uncertainty surrounding re-order trends and the sustainability of FIRE’s strong REC sales momentum. Combined with likely retail market share losses in Q4FY20, we maintain our cautious stance and our HOLD rating.”

“In addition, we introduce our FY22 forecasts, and lower our FY21 estimates to reflect a slower penetration of the REC market, while also reducing our margin assumptions due to a larger emphasis on the value segment and potentially promotion-driven sales growth,” he said.

The analyst is now calling for fiscal 2021 revenue of $61.5 million (previously $85.4 million) and EBITDA of $6.8 million (previously $17.1 million). At press time, his $0.15 target represented a projected return of 3.4 per cent.