Raymond James analyst Rahul Sarugaser is staying solid in his assessment of Cronos Group (Cronos Group Stock Quote, Chart, News, Analysts, Financials TSX:CRON), maintaining his “Outperform 2” rating and target of $6/share for a projected return of 117.4 per cent in an update to clients on Tuesday.
Founded in 2012 and headquartered in Toronto, Cronos is a Canadian licensed producer of cannabis. Sarugaser’s latest analysis arrives after the company announced that Ginkgo Bioworks, with whom Cronos has partnered to engineer a series of eight cannabinoids, has hit productivity targets for the third cell program geared toward the production of THCV, a molecule thought to moderate the properties of THC that cause the munchies, potentially powering a pipeline of new products with highly differentiated properties.
“With every new molecule the CRON-DNA pipeline yields, our conviction in CRON’s strategy to develop and deploy borderless products and IP strengthens,” Sarugaser said. “A modest-sized fermentation and manufacturing operation can be set up nearly anywhere in the world, and at much lesser expense than building out plant cultivation operations.”
Ginkgo Bioworks and Cronos Group initially announced their partnership in September 2018, with Cronos Group paying US$100 million to Ginkgo Bioworks to engineer organisms to produce a list of eight cannabinoids. With the completion of the THCV program, Cronos Group is producing an equity milestone payment of approximately 2.2 million common shares, which converts to approximately US$6 million.
“Continuing to hit these productivity milestones in partnership with Ginkgo fuels our innovation pipeline focused on creating borderless products utilizing rare cannabinoids that amplify and differentiate the consumer experience,” said Mike Gorenstein, Chairman, President and CEO of Cronos Group in a joint press release on June 21. “We are excited about the possibilities that THCV is expected to give us and look forward to getting more products with rare cannabinoids into market.”
Sarugaser forecasts Cronos Group’s revenue breaking into nine digits in 2022 at a projected $118 million for a potential year-over-year increase of 59.5 per cent. Looking ahead to 2023, Sarugaser forecasts a jump to $188 million, resulting in potential year-over-year growth of 59.3 per cent.
From a valuation perspective, Sarugaser forecasts the company’s EV/Revenue to drop from the reported 1.9x in 2021 to a projected 1.2x in 2022, then to a projected 0.8x in 2023.
Meanwhile, Sarugaser continues to forecast negative EBITDA on account of further investment, setting loss projections of $131 million and $106 million for 2022 and 2023, respectively.
Going forward, Sarugaser anticipates an escalating pace of announcements coming from the Cronos-Ginkgo partnership, namely the idea that the partnership may have developed, or is close to developing, technology to produce THC using CBG as an intermediate.
“That CRON’s cultured cannabinoid program—and borderless IP + brand strategy—is proceeding so well that CRON remains well-supported by its big-league CPG partner Altria, and that CRON has brought online one of the most sophisticated, efficient, low-COGS, large-scale cultivation operation through its GrowCo JV with Mucci Farms (private) in Leamington, ON, leads us to conclude that CRON has some serious staying power on the international cannabis stage,” Sarugaser said.