Uruguayan marijuana coming to Canada

Healthcare stock Emblem Corp. is a Canadian licensed producer of medical marijuana, providing patients with high-quality, premium cannabis strains. It has recently sourced a supply of high-cannabidiol marijuana from a Uruguayan supplier. PI Financial says the stock’s ‘speculative’ but give Emblem a ‘buy’ rating.

Healthcare StockOntario-based Emblem Corp. (TSXV—EMC; US:OTC—EMMBF) recently announced that it has entered into a non-binding memorandum of understanding and presale agreement with Montevideo, Uruguay-based ICC International Cannabis Corp. (TSXV—ICC), in order to import marijuana from Uruguay into Canada.

According to PI Financial Corp. securities analysts Jason Zandberg and Devin Schilling, the agreement also aims to establish a cooperative framework to exchange technical knowledge, information, experiences and practices regarding the cannabis industry.

Emblem is expected to provide the genetics for the high Cannabidiol (CBD) cannabis plant. CBD is the non-psychoactive component of the marijuana plant which is known for its therapeutic characteristics.

As part of the deal, Emblem will receive supplies of the CBD flower which supplement (not replace) Emblem’s high CBD strain production.

Emblem will then extract CBD from ICC’s exported dried product, creating CBD oil as well as other value-added pharmaceutical products for the medical marijuana market.

High-cannabidiol marijuana difficult to grow

The analysts note, marijuana strains with high CBD content are difficult and expensive to grow. Meanwhile its harvest variability is high.

If its rivals fail to reap a strong harvest—and Emblem succeeds—it could become one of a handful of suppliers who can consistently provide high CBD marijuana in a seller’s market.

Thus, they say the impact of the ICC deal is positive for Emblem’s investors, as it can provide a “back-stop” for the sought-after supply of high CBD-content marijuana.

“We believe the company can turn this low-cost high-CBD dried flower into value added products for the medical markets in Canada. ICC appears to have a low enough cost structure to compete in the Canadian market place.”

The analysts forecast Emblem will break even by the second quarter of 2018, and ramp up sales to $29.7 million and $55.8 million fiscal years 2018 and 2019, respectively. Their earnings before interest, tax, depreciation, and amortization (EBITDA) projection also remains unchanged for the same fiscal years, at $5.3 million and $17.8 million respectively.

Messrs. Zandberg and Schilling “continue to believe that Emblem will rank among the leading cannabis producers with a strong medical marijuana strategy.”

They believe this supply agreement will allow Emblem to maximize its sales potential of future medical CBD products.

They give Emblem a ‘buy’ rating, with a ‘speculative’ ranking, and increase their 12-month target to $3.75 from $3.50 due to an increase in peer multiples. Their target is 12 times (previously 11 times) their fiscal 2019 enterprise value to EBITDA ratio estimate.

This is an edited version of an article that was originally published for subscribers in the April 7, 2017, 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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