BZAM has a lot of upside from current levels, Clarus says

New insider buying is a good sign for Canadian cannabis company BZAM Ltd (BZAM Stock Quote, Charts, News, Analysts, Financials CSE:BZAM), according to Clarus Securities analyst Noel Atkinson, who provided an update to clients on Friday. 

BZAM has brands including BZAM, TGOD and Highly Dutch Organic and operates facilities in BC, Alberta, Ontario and Quebec and retail stores in Winnipeg, Manitoba, and Regina, Saskatchewan. The company announced on May 19 a non-brokered private placement of up to approx. 22 million units for gross proceeds of up to $5 million, with each unit to consist of one common share and one share purchase warrant at an exercise price of $0.40 for a period of three years from the closing date.

The press release said that BZAM’s Chairman, Bassam Alghanim, its largest shareholder, will take all of the units.

“We are grateful for the continued support of our Chairman and largest shareholder. This investment falls within the estimated range of funding anticipated at the time of the November merger to be required by the Company, as we continue to work toward achieving positive EBITDA and free cashflow in the second half of 2023,” said CEO Matt Milich in a statement.

Calling it a billionaire’s backstop, Atkinson said it’s a rarity in the cannabis sector, citing two US companies (Curaleaf and TerrAscend) as the only others known. Atkinson said this type of move tends to be appreciated by equity investors and he opined that both Curaleaf’s and TerrAscend’s valuation premiums in US cannabis can be partly attributed to the security afforded by their big insider investments.

“We had assumed that BZAM would complete an equity raise of $5 million gross proceeds in Q3 2023, albeit at a higher price ($0.45 net price) and therefore for less dilution (10 million shares assumed to be issued). The proceeds likely will be used to fund the next stage of merger integration costs and corporate overhead until free cash flow is achieved,” Atkinson wrote.

Atkinson said Clarus recently toured BZAM’s flagship cultivation facility in Ancaster, Ontario, originally developed by The Green Organic Dutchman, which has merged with BZAM. The analyst said he came away extremely impressed with the facility and the quality of the plants.

“The facility is completely off the electric grid (using natural gas cogen) and exclusively uses LEDs for shoulder lighting. There is very modest forced airflow and the rooms are densely planted, yet the large flowering rooms showed exacting levels of uniformity of plant height and robust cola quality that we’ve rarely seen in small indoor rooms, never mind in a greenhouse environment. Several strains are approaching or exceeding 30 per cent THC with high terpene potency as well, which again seems really strong for greenhouse production,” Atkinson wrote.

The analyst has updated his model to account for the private placement and is now calling for full 2023 and 2024 revenue of $99.2 million and $120.5 million, respectively, and 2023 and 2024 adjusted EBITDA of negative $2.9 million and positive $8.0 million, respectively.

With the update, Atkinson reiterated a “Speculative Buy” rating on BZAM and one-year target of $0.65 per share, reflecting at the time of publication a return of 189 per cent.