With the purchase of new greenhouse facilities, marijuana producer MedReleaf Corp. (TSX:LEAF) just quadrupled its growing capacity. That’s cause for a forecast update and target price raise, says Martin Landry of GMP Securities, who maintains his “Buy” rating and raises his one-year target to $35.00.
Yesterday, MedReleaf announced a greenhouse and land deal in Exeter, Ontario, which will see the company take over 164 acres and one million square feet of greenhouse space. The purchase, for $21.5 million plus 225,083 shares, is likely to vault the company’s production into the big leagues, says Landry, with LEAF jumping from 35,000 kg of cannabis per year to an estimated 140,000 kg. MedReleaf says that it will now begin retrofitting the new greenhouse, which should have its first cannabis harvest by the end of 2018.
“The Exeter facility should catapult LEAF’s production profile to the fourth largest in the sector, behind only Canopy Growth, Aphria and Aurora Cannabis (using prior published estimates),” says Landry in a note to clients on Monday. “Onset of production should also be quite rapid (~9 months), improving LEAF’s positioning.”
The deal means that MedReleaf will be producing 75 per cent of its cannabis outdoors and only 25 per cent indoors, adding healthy diversity to its production profile, says Landry.
“Further diversification should come from our expectation for a large portion of Exeter production to be devoted to extracts, potentially destined for international markets,” says the analyst. “Given LEAF’s historical focus on high quality products, we expect a similar focus for the Exeter facility, assisted by lighting/shading systems and environmental controls. Hence, we believe the CAPEX needed for Exeter could be slightly higher than industry averages for retro-fitting hybrid greenhouses.”
Landry says MedReleaf’s reputation for delivering a high-quality product will serve the company well as a powerful marketing tool once legalization of recreational marijuana becomes a reality. LEAF won four of nine awards for product quality given at the 2017 Canadian Cannabis Awards in December, including Top Licensed Producer.
As well, the company stands as one of the leading cultivators in the country, says Landry. “LEAF’s cash costs of $1.60/gram (YTD) are among the lowest in the industry, which is impressive given all production is done indoors,” says the analyst. “This is partly due to MedReleaf’s production team successfully improving yields over the last four years at the ~7,000kg capacity Markham facility.”
The analyst thinks that LEAF will produce an EBITDA of $2.018 million on revenue of $44.853 million in fiscal year 2018 and an EBITDA of $45.720 million on $168.658 of revenue in F2019.
Landry maintains his “Buy” rating for LEAF with a target price of $35.00 (previously $30.00), representing a projected return of 86.4 per cent at the time of publication.
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