Beacon Securities raises target price to $4.00From Beacon Securities:
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Yesterday, we attended an event at Cronos’ Peace Naturals site where it broke ground on two new production facilities.
These facilities will represent an aggregate 315K sq. ft. of production space, consisting of a 286K sq. ft. purpose built indoor facility, a 28K sq. ft. greenhouse, and a 1,200 sq. ft. extraction facility.
This expansion is significantly larger than we had modeled and represents a massive change from the current footprint at Peace (~30K sq. ft.). The company estimates a 40,000 kg annualized production run rate at Peace post the build-out. We had previously forecasted just over 29,000 kg, which we are raising today to just over 35,000 kg. The structure of the indoor building is expected to be fully constructed by November 2017 with the facility being fully operational by the summer of 2018. We believe the greenhouse has a much faster construction time and that the company may see some revenue from its production this year. We have updated our model to reflect the new details unveiled yesterday. We note that we have not modelled any expansion at Cronos’ In The Zone (ITZ) 31 acre property, other than via its Indigenous Roots JV. To that end, we note the CEO Michael Gorenstein indicated in his remarks that “this is only the first phase of our expansion” and that “the second inning begins today” for Cronos. Our tour yesterday helped reinforce the seemingly boundless potential for expansion on Peace’s 95 acres of zoned land (see Exhibit 1, left), and we noted considerable improvements at the existing buildings since our last visit as the site is now GMP certified.
We maintain our Buy recommendation. We are raising our target price to $4.00 (from $3.50). Up 64%, Cronos remains the best performing LP YTD. However, its shares have not been immune to the pullback several companies have experienced in recent weeks. Prior to yesterday’s 8% move, Cronos’ shares were at a three-month low. With so much on the go (two expansions at Peace, a new extraction machine / emphasis on higher margin oils, potential plans at ITZ, updates awaited at Indigenous Roots, an RFP for cultivation in Germany) we believe Cronos’ shares could perform quite well over the summer.