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Rubicon Organics is a Buy in cannabis, says Raymond James

Rubicon Organics

Seasonally weak first quarter numbers have arrived from premium organic cannabis grower Rubicon Organics (Rubicon Organics Stock Quote, Charts, News, Analysts, Financials TSXV:ROMJ), but the stock retained its “Outperform 2” rating from Raymond James analyst Rahul Sarugaser in a Wednesday client report, with the analyst saying positive earnings are right around the corner for Rubicon.

Vertically-integrated Rubicon operates a facility in Delta, BC, and holds brands Simply Bare Organic, the flower and hash brand 1964 Supply Co., premium concentrate banner Lab Theory and Homestead Cannabis Supply. The company announced its first quarter 2022 financials on Tuesday, featuring $5.2 million in net revenue which represented a 25 per cent year-over-year increase but a 24 per cent sequential decrease.

Rubicon said it maintained 7.1 per cent of the national market share of premium flower and pre-rolls compared to 7.6 per cent in the previous quarter, while it sported the number one Premium flower and pre-roll brand in Canada in Simply Bare and the number one Topical brand with the licensed Wildflower topical sticks.

“Rubicon Organics is at a turning point in 2022, with higher yields and increased quality coming from our Delta Facility, whilst remaining cost-conscious we are driving to being profitable in 2022. Furthermore, with our IMC-G.A.P certification in hand, I am excited to introduce our premium brands and products to international medical cannabis markets. I am also pleased to reiterate our guidance of achieving positive Adjusted EBITDA and operating cashflow in the second half of 2022,” said Jesse McConnell, CEO, in a press release.

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Looking at the Q1 numbers, Sarugaser said the $5.2 million topline was a mild miss of his $5.7 million estimate and the consensus call of $6.0 million, while the company’s adjusted EBITDA loss of $1.5 million (compared to negative $3.4 million a year earlier) registered a slight beat of Sarugaser’s estimate at negative $1.6 million while missing the Street’s call of negative $0.9 million. On net income, Rubicon’s loss of $2.9 million was again a beat of Sarugaser’s $3.1 million forecast loss but a miss on the consensus estimated loss of $1.6 million.

In his comments, Sarugaser noted Rubicon’s drop in market share, where it went from 15th place nationally at the end of the fourth quarter 2021 to being roughly in a three-way tie for 16th place with The Green Organic Dutchman and Sundial and closely trailing Aleafia.

“As we highlighted in our note on ROMJ’s 4Q21 earnings, ROMJ management is driving hard toward profitable operation; so, we remain confident that ROMJ should drive a Revenue inflection—that should in turn drive +EBITDA—during 3Q22 as a result of yield and quality enhancements set in place during the last several quarters and enacted during 2Q22. We also expect that with ROMJ’s leaner cost structure and its cultivation enhancements alone, ROMJ has the capability to escalate its top and bottom lines, motivating a breakeven threshold-cross during 2H22,” Sarugaser wrote.

The analyst also pointed out strong sales growth from Rubicon’s 1964 Supply Co, which had revenue up 141 per cent year-over-year, driven by the introduction of Lebanese style hash. ROMJ finished the quarter with $8.8 million in cash compared to $11.6 million at the end of the previous quarter and debt of $9.8 million compared to $9.6 million at the end of the Q4 2021.

With his retained “Outperform” rating, Sarugaser likewise stayed with a $3.50 target price, which at press time represented a projected one-year return of 273.3 per cent. 

“Should ROMJ execute any high-margin international supply contracts—the company expects first exports in 2H22, impelled by its recent IMC-G.A.P. certification (good for medical exports to Israel or EU-GMP-certified facilities in Europe and Australia)—profitability would, in our view, be virtually assured. Remaining conservative, we do not model in international sales until they are regular and recurring.

Like most of the industry players, Rubicon’s share price has been on a decided slump over the past year or more. ROMJ is currently down about 54 per cent year-to-date and down 67 per cent.

Earlier this month, Rubicon announced that it had received its CUMCS Equivalency IMC-GAP certification, which is the leading certification standard for medical cannabis cultivation, harvest and primary processing for international export.

“Rubicon Organics has achieved an important milestone for international export with the Certification as it allows Rubicon to export our products internationally and is a key step in delivering on our vision to be the global brand leader in premium organic cannabis,” said McConnell in a press release.

 

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