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Rubicon Organics is a Buy in pot stocks, says Haywood

It’s all systems go for Canadian cannabis name Rubicon Organics (Rubicon Organics Stock Quote, Charts, News, Analysts, Financials TSXV:ROMJ), according to Haywood Capital Markets analyst Neal Gilmer, who updated clients on the company in a Monday report. Gilmer said Rubicon is doing well at positioning itself in the niche market for premium organic flower across the country.

Vancouver-based Rubicon, a vertically-integrated cannabis company with flagship brand Simply Bare Organic, is in the middle of a corporate turnover, with co-founder and CEO Jesse McConnell announcing his resignation last month and an anticipated departure date (although McConnell is currently on parental leave) of December 31, 2022. 

In light of the change, Rubicon delivered on Monday a corporate and operational update, saying management is reiterating its financial guidance from its second quarter 2022 financial report, delivered on August 15. The gist is that Rubicon expects to be operating cashflow positive and adjusted EBITDA profitable for the 2022 year.

“As previously reported, the Company achieved positive Adjusted EBITDA in the three months ended June 30, 2022. We believe that our increased product quality and brand portfolio has positioned Rubicon to deliver on its commitments and win in the premium cannabis market in Canada,” the company said in its press release.

Rubicon also said that it has completed its BC Hydro power grid upgrade at its Delta facility. Further, Rubicon said Simply Bare remains the #1 premium cannabis brand by flower and pre-roll sales across the country. The company noted that growth in the premium segment of the Canadian market is outpacing overall growth in the industry, which bodes well for ROMJ, which for the three months ending August 31, 2022, had 8.6 per cent of the premium flower and pre-roll market.

Rubicon added that the Board has begun its search for a new CEO.

“Every product in Rubicon Organics’ portfolio delivers positive gross profit and our financial discipline as well as cost saving initiatives, such as the BC Hydro power upgrade, are driving us to our first full year of Adjusted EBITDA profitability,” said CFO Margaret Brodie in the press release. 

Commenting on the corporate update, Gilmer said Rubicon aims to launch new products across certain markets in September and October to capitalize on its strong foothold in the premium market. 

“In terms of total Canadian adult-use market share, Rubicon is also showing growth and climbing the ranks,” Gilmer wrote. “August market share of 2.74 per cent, the company’s highest level to date, represents the 11th overall market share position and is a 115-bps increase from August 2021. Rubicon had ranked 10th overall for the months of May and June with an average market share of 2.62 per cent. The Canada-wide market share data points are as per the latest Hifyre data for all product categories and price points.”

Cannabis stocks have all been doing poorly for over a year and a half now, and ROMJ look no different, having dropped from a high around $4.25 per share in October 2020 to now touching on $0.60. 

But Gilmer sees better days ahead. With his update, Gilmer retained a “Buy” recommendation and $2.50 target price with a “Very High” risk rating. At press time, Gilmer’s target represented a projected one-year return of 317 per cent.

“Rubicon continues to have strong market share across its markets,” Gilmer said. “The company remains prudent in operating expenses with a solid balance sheet. We believe the company is positioned to established itself in a strong niche segment of the market.”

Haywood’s forecast for Rubicon has the company reaching 2022 revenue of $35.8 million compared to $22.7 million last year and heading to $51.9 million in 2023. On EBITDA, the call is for $1.2 million compared to negative $8.0 million last year and moving to $6.2 million for 2023. Fully diluted EPS is expected to go from negative $0.26 per share in 2021 to negative $0.07 in 2022 and to negative $0.01 per share in 2023.

Gilmer said ROMJ is currently trading at 0.6x his 2023 EV/Revenue estimate, which compares to its small-cap Canadian peers at 0.8x, excluding the high and low.

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