Supreme’s mission to light up the cannabis sector

PI Financial analysts Devin Schilling and Jason Zandberg are ‘fired up’ about a new supplier of medical cannabis, whose mission, in turn, is to ‘light up’ the cannabis sector.

Cannabis_SectorBC-based PI Financial Corp. analysts Devin Schilling and Jason Zandberg say they are fired up about the prospects of the Supreme Cannabis Co. Inc.’s (TSXV—FIRE) stock valuation. They say that the newly-licensed, premium cultivator has made a quick start to its low-cost, wholesale-only business model.

Supreme Cannabis owns and operates 7ACRES which is a licensed cultivator and seller of medical cannabis in Canada. Supreme grows cannabis in a hybrid greenhouse located in Kincardine, Ontario. The company’s web site claims they are on a “mission to light up the cannabis sector”.

Messrs. Schilling and Zandberg add that the industry as a whole will benefit from financial tailwinds that legal recreational marijuana will provide. Furthermore, the analysts note that the company’s management team has experience within the legal and political aspects of cannabis legalization and in running high-growth companies.

With these views in mind, they anticipate relatively strong wholesale prices for Supreme’s cannabis. In the short-term they forecast licensed producers across the country would come to Supreme when they require fresh inventory while expanding/constructing their respective facilities.

In the long-term, they suggest Supreme can differentiate their cannabis as “premium quality flower” and command a higher than average price. They forecast sales of $11 million, $50.9 million and $113.6 million for the fiscal years between 2018 and 2020 (June year-end).

Their earnings before interest, taxes, depreciation and amortization (EBITDA) forecast for the same period are -$6.2 million, $8.4 million and $34.7 million, respectively.

Low market cap makes this a bargain stock

With these figures in hand, the analysts say Supreme represents good relative value in the cannabis sector. They add that its current capacity is comparable to many of the recognized market leaders yet FIRE’s market capitalization is a fraction of these companies. As a result, they conclude this weed stock is a bargain.

Messrs. Zandberg and Schilling initiate coverage of The Supreme Cannabis Company with a ‘buy’ recommendation, ‘speculative’ risk rating, and a 12-month target of $4.50. They elaborate further on their investment thesis:

“Supreme is fully licensed by Health Canada to cultivate and sell dried cannabis. Supreme was awarded its sales license from Health Canada in June 2017 and since then has reported $1.6 million in sales from its first quarter and within four months expanded its capacity by fourfold to 5,000 kilograms.

“The facility used to cultivate is a hybrid greenhouse that has isolated grow rooms that enable FIRE to control its growing environment while using natural sunlight to grow a terpene rich product. We believe this method provides advantages of both indoor growing (standardization) and greenhouse (cost savings).

“Supreme exclusively sells its cannabis through wholesale channels and decided not to sell directly to patients. Thus, Supreme does not pay costly fees and expenses to acquire and maintain medical cannabis patients. So not only does Supreme employ a low-cost greenhouse model but its operating costs are lower than the average LP [licensed producer] in Canada.

“We believe Supreme will make an ideal supply partner for the many provincial and territorial cannabis distributors due to its high quality cannabis and its business-to-business model. Supreme is led by John Fowler who has spent over a decade operating in the Canadian medical cannabis sector as a producer, patients’ right advocate and as an attorney. Nav Dhaliwal is currently Supreme’s president and has extensive leadership and senior management experience at high growth companies.”

This is an edited version of an article that was originally published for subscribers in the March 9, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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