Rubicon Organics wins high praise from Raymond James

Look for premium cannabis producer Rubicon Organics (Rubicon Organics Stock Quote, Chart, News, Analysts, Financials TSXV:ROMJ) to take a growing share of Canada’s adult-use market in the years to come, says Raymond James analyst Rahul Sarugaser, who launched coverage of the stock on Thursday with a “Strong Buy 1” rating and $6.00 per share target. Sarugaser said Rubicon is his best micro cap cannabis idea, as the company is carving out a profitable niche in the premium/craft cannabis market.

For a little background on Rubicon, the Delta, BC-based company has roots in Whistler Medical Marijuana Corp, which was the country’s first organic-certified licensed producer and was co-founded and operated by Jesse McConnell, now the CEO of Rubicon. Whistler Medical was bought by Aurora Cannabis in 2019 for $175 million. Rubicon received its cultivation and processing licenses from Health Canada in February 2019, while as a public company, ROMJ began trading on the CSE in October of 2018 before moving to the TSX Venture in September 2020.

With its focus solely on the production of ‘super-premium’ cannabis, ROMJ is currently one of six LPs in the country to offer certified organic products and one of only two LPs to produce organic, premium cannabis for both the adult and medical use markets. In terms of operations, Rubicon has a 125,000 sq ft hybrid greenhouse in BC and it currently has supply agreements with six provinces: Ontario, BC, Alberta, Saskatchewan, Manitoba and Quebec.

Sarugaser said Rubicon is in the middle stages of a formidable revenue ramp, buoyed by market share expansion, a recent supply agreement with Quebec (which the analyst calls “a notoriously challenging, sequestered market to access”), new and broadened product launches and enviable margins.

“Similar to premium liquor brands affiliated with rarity and presitge — Johnny Walker Blue Label is a favourite example — ROMJ is building distinguished premium brands built on a portfolio of intensely high-quality, innovative cannabis products designed to generate the sector’s highest gross margins: >50 per cent,” Sarugaser wrote.

“Our channel checks indicate that premium cannabis (>$10/gram) presently makes up ~15 per cent of the Canadian marketplace by revenue, and, leveraging data from mature US cannabis states, we see premium and super-premium cannabis offerings comprising ~20 per cent market share of 2025’s ~$10-billion market. We believe ROMJ has masterfully set the stage to own a meaningful portion of this growing market segment, both in Canada and internationally,” Sarugaser said.

On the management side, Sarugaser said ROMJ has deep cannabis culture ties through Whistler Medical and “big brand chops” with “a full complement of seasoned CPG industry executives, leveraging experience from iconic companies and brands such as Coca-Cola, Pepsi, Diageo, L’Oreal, and Nestle,” Sarugaser wrote.

The analyst noted that 2020 was a big year for Rubicon in terms of product launches, with Lab Theory’s line of concentrates, Quebec-exclusive 1964 line of flower and hash and expansions to its Simply Bare Organic lineup arriving at the back end of the year. The company aims to roll out a suite of new products over the first half of 2021, including more flower strains and premium derivatives (‘Cannabis 2.0’) products such as vapes, concentrates and topicals.

In terms of financials, Rubicon last reported earnings in late November where its third quarter ended September 30, 2020, featured net revenue up 219 per cent sequentially to $3.2 million and an adjusted EBITDA loss of $2.6 million.

Management said in the Q3 report that the company had been at that time operating at full capacity for six months.

“The net revenue increase we delivered in Q3 2020 is only the beginning of Rubicon Organics demonstrating its potential,” said McConnell in a November 25 press release. “We have invested in world class personnel that will help bring new brands and products to market that will capture the desire of consumers to drive our growth in revenue and profitability.”

For his part, Sarugaser sees ROMJ growing its share of the adult-use market in Canada from its current 1.0 per cent as of Q3/2020 to 5.0 per cent by 2025 and that the company will capture 25 per cent of the premium/craft cannabis market, which he predicts will encompass about 20 per cent of the total market.

The analyst is calling for Rubicon to generate full 2020 revenue and EBITDA of $9 million and negative $10 million, respectively, 2021 revenue and EBITDA of $27 million and $2 million, respectively, and 2022 revenue and EBITDA of $52 million and $16 million, respectively.

On valuation, Sarugaser wrote, “Our revenue estimates imply that ROMJ trades at 7.2x 2021 EV/Revenue, while peers average 12.6x. Simply right-sizing ROMJ relative to peers (conservatively not applying a premium from ROMJ’s larger projected margins), we derive an EV/Revenue valuation of $5.83/share. We sanity-check this calculation against a DCF analysis (10 per cent discount, 2 per cent terminal rates), which implies a current value of $5.93/share. We round these estimates to a target price of $6.00/share.”

At the time of publication, Sarugaser’s $6.00 target represented a projected one-year return of 45 per cent.

“Given our confidence in management’s heritage, combined with their selection of—and execution in—the highest margin segment of the market, we initiate coverage with a Strong Buy rating,” Sarugaser wrote.