As the market still fails to separate the Canadian cannabis companies from the overhyped one’s trading on major U.S. stock exchanges, Supreme Cannabis (SPRWF) offers a compelling investment. The stock trades near the lows around $1 offering an ideal entry point in a developing cannabis brand under the radar of most investors.
Growth Ramp
The company reported FQ4 results for the period ending June grew 90% sequentially. Supreme Cannabis saw revenues surge to C$19.0 million, up from C$10.0 million, as the business shifted from the wholesale market to recreational sales via the 7ACRES brand. The company is shifting from the low margin wholesale market to much more attractive recreational sales.
The best part of the story is the growth was generated on the backs of solid fundamentals. The company generated an adjusted EBITDA of C$3.2 million in the quarter.
The company has listed quarterly operating expenses of C$11.6 million and adjusted operating expenses below C$10.0 million. Supreme Cannabis was able to grow revenues substantially without a major increase in operating expenses allowing the adjusted EBITDA to grow by an incredible ~C$4.8 million from the prior quarter. In the process, the company captured EBITDA margins of nearly 50% of all additional revenues.
Going forward, Supreme Cannabis purchased both Truverra and Blissco Cannabis to enter the global CBD market. The Truverra merger cost ~C$20 million and expanded their business into the European hemp-based CBD market in select countries selling balms, softgels and organic oils.
For these reasons, the company is forecasting FY20 revenues between C$150 to C$180 million. Even better, Supreme Cannabis expects to remain adjusted EBITDA positive during this growth ramp phase.
The market will eventually separate out the cannabis stocks that can grow profitably from those that wildly spend shareholder cash. In addition, the company is already three months into FY20 so the market will soon start looking toward FY21 forecasts where revenues will easily top C$200 million.
Value Play
The stock has a listed market value of only $315 million or C$425 million. Very few Canadian cannabis stocks trade for valuations in the 2x-3x forward sales levels.
The company maintains a catalyst for the stock via a listing on major U.S. stock exchanges. In addition, the small size of Supreme Cannabis would make the stock a logical tuck in acquisition for a medium sized cannabis player looking for more scale.
Regardless, the stock is a value play whether these catalysts eventually play out or not. Investors should not buy a stock relying on such outcomes.
Supreme Cannabis has a small, but vocal camp of bullish analysts with positive expectations for its stock. Out of the 3 analysts polled by TipRanks, all 3 rate the stock a Buy. With a return potential of 125%, the stock’s 12-month consensus target price stands at $2.16. (See Supreme Cannabis’ price targets and analyst ratings on TipRanks)
Takeaway
The key investor takeaway is that Supreme Cannabis offers a supreme opportunity for a Canadian cannabis player over looked by the stock market. As this company grows and scales, the market will become better acquainted with the stock and the valuation will rise.
With analyst revenues estimates above C$200 million for FY21, the market will increasingly find it difficult to look past the valuation on Supreme Cannabis trading for a market value of only C$470 million with likely substantial upside to revenue estimates from the CBD business. Don’t let this supreme opportunity pass.
Disclosure: No position.
