Cronos Group is the best value name in cannabis, says Raymond James

Investors looking for a diamond in the rough of Canadian cannabis companies should look no further, as Raymond James analyst Rahul Sarugaser has the name you’ll want to own in Cronos Group (Cronos Group Stock Quote, Charts, News, Analysts, Financials NASDAQ:CRON). On Friday, Sarugaser delivered a report to clients on the company’s recent progress, including CRON’s market positioning over the month of June across Canada.

Licensed cannabis producer Cronos has medical and adult recreational sales in Canada along with an international presence with medical cannabis sales in Israel. Cronos has a partnership with biotech company Ginkgo Bioworks on the production of synthetic cannabinoids and the company also has tobacco giant Altria as a backer to the tune of $2.4 billion.

Sarugaser pointed to June’s cannabis market results as a sign of Cronos’ strong performance, where the company was tied with HEXO for fifth spot in the Cannabis Flower space (which makes up 41 per cent of the adult-use market). Cronos captured six per cent of sales in the category, with Organigram at #1 with 12 per cent, Village Farms at #2 with ten per cent and Tilray at #3 with nine per cent.

In the Pre-Roll category, which represents 29 per cent of the adult-use market), Cronos was Canada’s #13 seller with one per cent of sales. In Vapes, which is 14 per cent of the market, Cronos was #7 and in Edibles Cronos was at #3. 

With the market results, Sarugaser updated his estimates on Cronos and is now calling for  2022 revenue and EBITDA of $114 million and negative $86 million, respectively, and for 2023 revenue and EBITDA of $180 million and negative $80 million, respectively. (All figures in US dollars.)

On valuation, the analyst has CRON’s EV/EBITDA multiple going from negative 1.0x for 2021 to negative 1.9x for 2022 to negative 2.0x for 2023. On EV/Revenue, Sarugaser is projecting CRON to go from 2.1x in 2021 to 1.4x in 2022 to 0.9x in 2023.

With the update, Sarugaser is reiterating an “Outperform 2” rating for CRON and moving his target price from $6.00 to $7.00 per share, which at the time of publication represented a projected one-year return of 138 per cent.

For his target price, Sarugaser is now using a 2.0x multiple of Cronos’ 2023 EV/Revenue (was 2.5x 2022 EV/Rev), which implies $6.63 per share, which he has raised to $7.00.

“We view CRON as a strong, well-insulated name that, we highlight, is trading marginally above its cash value; we maintain our rating at Outperform 2,” Sarugaser wrote.

Sarugaser said he visited Cronos’ 850,000 sq ft GrowCo facility in May (Cronos has a joint venture with Mucci Farms at GrowCo), and said that GrowCo is already cultivating cannabis at an industry-leading cost of good sold. Sarugaser said he expects GrowCo’s cultivation and manufacturing capabilities will escalate during the next few quarters and that the true margin and bottom-line pick-up from GrowCo will be evident around the third quarter of the current year.

“Overall, we believe CRON is 1 of the 5 producers in Canada with fully built, highly productive, and efficient facilities—large-scale facilities like these will never be built again in Canada, in our view—that will supply Canada with mass-market cannabis long-term. Using beer sales as a proxy—~80-85 per cent of sales from mass-market brands; 15-20 per cent from ‘craft’ brands—we believe CRON has the potential to capture 10-15% national market share,” Sarugaser wrote.

As for its international business, Sarugaser pointed to the company’s “very encouraging” and potentially durable sales into Israel, where Cronos drove $9.1 million in high-margin sales over the first quarter of 2022. 

“We are beginning to see CRON’s focus on margin-accretive segments, low-cost cultivation (weening off wholesale buying), and international markets bear fruit, which we see as a direct result of Mike Gorenstein returning to the CEO seat and executing on the company’s long-term realignment plan,” Sarugaser wrote.

On Ginkgo Bioworks’ progress, Sarugaser said the company is delivering more and more positive results in the form of new cannabinoid combinations and new delivery systems. 

“Affirming the quickening cadence of this engineering effort, CRON announced in June that Ginkgo had delivered another rare cannabinoid: THCV; while it took nearly three years from the time DNA signed its deal with CRON to hit productivity targets for its first cultured cannabinoid, CBG, the last ten months have yielded three different, production-ready rare cannabinoids. And, notably, we believe that Ginkgo engineering an organism to produce THCV implies that it has figured out the metabolic leap from CBG to THC,” Sarugaser said.

Ahead of Cronos’ second quarter results due on August 8, Sarugaser said he’s of the view that CRON is “a high growth-potential, well-insulated, value-priced name in the hyper-volatile cannabis sector (~US$1 billion cash pile, relatively low $30-50 million/Q burn, $160 million EV). We believe CRON is the best value name in cannabis,” he said.