A recent survey by The MoneyLetter of securities analysts’ reports found two junior cannabis-related stocks favored by Toronto-based Mackie Research Capital.
Toronto-based Mackie Research analyst Nikhil Thadani initiated coverage of technology stock Lift & Co. Corp. (TSXV—LIFT) by boldly declaring the company’s stock price will grow like a weed. Lift is a web-based publisher that provides analytics and multiple marketing channels to the cannabis industry. Mr. Thadani gives it a Speculative Buy recommendation and a $0.80-per-share target price. The analyst comments:
“Stocks in the data provider, loyalty and reviews space tend to trade at an average of three-to-four times forward sales based on consensus sales estimates from Bloomberg, with a projected revenue growth of roughly 10 per cent year-over-year in 2020.
“Applying a multiple of four times forward sales to Lift’s potential 2021 revenue, which could approach about $20 million overlaid on the company’s current fully-diluted share count . . . implies a stock price of around $0.85.
“We also apply a discounted cash flow (DCF) to Lift’s target financial model (equaling our target price of $0.80), which could begin to generate positive operating income in 2021 and eventually scale to well over 20 per cent net-income margin on scaled revenues of roughly $40 million in about three years (from $20 million in 2021).”
Events and conferences supplement marketing
Lift’s platform becomes more relevant as the cannabis industry becomes more “CPG-like” (or in other words, similar to other famous consumer-packaged goods providers).
Lift’s four-pronged approach packages, monetizes and markets relevant insights built via very well regarded ‘must attend’ events and conferences, says the analyst, “which build trust in this nascent ecosystem, provide an opportunity funnel and are monetized via ticket sales, booths, sponsorships, etc.”
Secondly, it aggregates user reviews for recreational cannabis, monetized via advertisements and sponsorships. Thirdly, retail-training programs, which are mandatory and provide an important purchase influencer marketing conduit, are monetized via training programs and sponsored content. Lastly, its data insights are also monetized via tiered subscriptions, providing data dashboards, user panels and batched data sales.
Insider ownership of Lift’s stock is at 51 per cent. It bodes well for shareholder interests, claims Mr. Thadani. Lift’s largest institutional shareholder, Gotham Green Partners (GGP), owns about 10.5 million shares (roughly 15 per cent basic shares outstanding) as well as about $2 million of convertible debentures. GGP is a very well regarded institutional investor in the cannabis sector, he says, having made investments in excess of US$500 million across the value chain in recent months.
Industry growth will increase demand for Lift
“Lift’s Canadian retail opportunity is just getting started—Lift’s CannSell could have an addressable opportunity of about $60 million in Ontario. Cannabis 2.0 is likely a positive catalyst for data insights owing to greater product variety and need for providing customers more product information.
“We would view any potential entry by Lift into the US (likely California first) very positively. For example, roughly two years ago, according to various media reports, adjacent providers such as Weedmaps and Leafly were generating up to US$60 per user revenue annually versus Lift’s current non-events revenue of only $2.25 per user annually.”
Based on the latter, Mr. Thadani concludes there is plenty of room for the cannabis industry revenue to grow, alongside demand for Lift’s data-centric and media services.
Lift & Co. operates as a cannabis media and technology company.
Ontario retail stores will increase demand
Organigram Holdings Inc. (TSX—OGI) reported decent but mixed third fiscal quarter 2019 results. Overall, Toronto-based Mackie Research analyst Greg McLeish says OGI remains positioned as one of the leading licensed cannabis producers in Canada, with significant sales growth from Alberta and Atlantic Canada. He maintains his Buy recommendation and $12.50-per-share target price.
Beyond Alberta and Atlantic Canada, management believes Ontario could put in another large pipeline order in advance of 50 new stores being eligible for opening on Oct. 8, 2019. It also has good potential from its cannabis concentrates product line, Mr. McLeish reports.
Organigram reported significant growth (up 563 per cent year-over-year) in cannabis oil sales. Sales of cannabis oils were 5,090 liters in the third fiscal quarter, which was seven per cent below Mr. McLeish’s forecast.
Derivative products have room to grow
OGI’s management believes that derivative products (e.g. oils, vape pens, edibles, beverages etc.) will represent at least half of legal market demand by early 2020). Meanwhile, Mr. McLeish believes extraction capacity will be critical when edibles and concentrates become legal in autumn 2019.
The company added a stable source of high-quality extracted oils after signing a multi-year extraction services agreement with Kelowna-based Valens GroWorks Corp. In addition, the company is in the process of expanding its in-house extraction capabilities as part of its Phase 5 expansion and it expects construction to be completed by the end of 2019.
Also, in June 2019, Organigram announced it had partnered with San Francisco-based PAX Labs Inc. and Sudbury-based Feather Company Ltd. The company was selected as one of the four Canadian launch partners of PAX Era, the premium closed-loop vaporizer solution.
Organigram will produce and fill Edison Cannabis Company-branded pods specifically for the PAX Era platform. The company also signed an agreement with Feather Company Ltd. for an exclusive Canadian license to Feather’s proprietary vaporizer pen technology. Organigram also partnered with Canada’s Smartest Kitchen to develop premium chocolate products for its cannabis edibles.
Organigram focused on indoor operations
Another factor to consider when investing in OGI is its indoor growing methods. “We have heard from industry sources that a number of licensed producers have had trouble ramping up their facilities, and that a couple have had outright crop failures,” says Mr. McLeish.
“Organigram has chosen an indoor cultivation where all aspects of the growing environment are monitored and controlled, including light, heat and water. This allows the company to optimize growing cycles, improve overall yield, ensure consistent product quality and reduce the need for insecticides.
“The company remains on schedule with its Phase 4 expansion and it is expected to be completed December 2019. Phase 4 will have a state-of-the-art mechanical system and an improved irrigation system as compared to previous Phases that are designed to capture, treat and re-use water from dehumidification that is central to the cultivation process. The full Phase 4 expansion represents a total of 77,000 kilograms per year of additional annual capacity (it currently produces 61,000 kilograms per year of cannabis).
“Once fully licensed and operational, the expansion is expected to bring the company’s annualized target production capacity to approximately 113,000 kilograms of dried flower equivalents. The budget for Phase 4 is $125 million and it is currently 60 per cent complete (target end date) for late year-end 2019.”
Based in Moncton, Organigram Holdings is a licensed producer involved in cultivating, storing and selling medical marijuana.
This is an edited version of an article that was originally published for subscribers in the August 2019/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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