As previously discussed, the opportunity in the cannabis sector remains in the stocks not trading on the major U.S. stock exchanges. The Supreme Cannabis Company (SPRWF) is another example of a great growth story generally under the radar of the investing public due to the stock market focus on the large Canadian LPs.
Relative Value
The stock has a listed market valuation of $350 million while the company just reported March quarter results of C$10.0 million or roughly $7.5 million. The analyst community forecasts Supreme reaching annual sales of $100 million for the year ended next June.
The company is focused on the adult-use market, thereby skipping the medical cannabis market. The focus on the premium adult-use market versus chasing multiple end markets should help improve margins.
As with most cannabis companies, Supreme Cannabis is rapidly expanding cultivation and production space. The company recently had an additional 50,000 sq. ft. of production space approved by Health Canada to bring the total to 230,000 sq. ft.
The key here is that Supreme Cannabis is growing rapidly, but not wildly. The company started the year with 13,300 kg of cultivation capacity and now has approval for 33,580 kg of production. The ultimate goal for the facility in B.C. is to reach capacity of 50,000 kg.
In addition, the company is working on international expansion. Deals with Malta and an investment in Lesotho in Africa provide other avenues for growth outside of the U.S.
Either way, the stock only trades at roughly 3.5x sales providing one of the lowest valuations in the cannabis sector. Supreme Cannabis recently agreed to buy Blissco for C$48 million in an all-stock transaction to provide more scope in the premium cannabis market. The deal should highlight how a larger company looking for scale could easily acquire Supreme Cannabis in a small deal to add $100 million in annualized revenues.
Cannabis 2.0
The company made a quick response to the new Health Canada regulations placing Supreme Cannabis in a position to thrive under the new rules. The cannabis company doesn’t have the market valuation or wild production plans that require an aggressive initial rollout.
Supreme Cannabis plans to create high-quality cannabis extracts, vaping liquids, concentrates, oils and tinctures. The prime plan surrounds the recent deal with Pax Labs that allows for the company to supply pods for the PAX Era vaporizer that has sold over 1.5 million devices worldwide. The company is one of only four licenses in Canada.
As stated in the updated Health Canada regulations, the company can apply for an amended license on July 15. On October 17, Supreme Cannabis can submit info on the new consumable products providing the government with a 60-day notice before the products go on sale by mid-December.
The timeline isn’t ideal because Supreme Cannabis appears ready to on the original stated timeline of October 17, but a shareholder is positioned at a reasonable valuation that can handle any delays.
Takeaway
The key investor takeaway is that Supreme Cannabis is positioned for solid growth with a stock trading at a reasonable valuation. Cannabis 2.0 is a growth opportunity that will boost the stock valuation for the company while other large players need the new edibles and vapes sales in order to justify current market valuations and large cultivation plans that appear unreasonably excessive.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: No position.
