Emblem Corp EMMBF

EMC EMMBF Emblem corp upgrade - Price target: $4.00

[Martinez1441]

EIGHT CAPITAL UPGRADES EMC TARGET PRICE. 

October 17, 2018
 
Graeme Kreindler, CPA, CA / [phone]
[e-mail]
William Haynes / [phone]
[e-mail]
Patrick Sullivan, P.Eng, MBA / [phone]
[e-mail]
Rec is Here: Reinforcing Top Picks and Trading Action
 
Today, the Cannabis Act comes into force as law in Canada, marking the end of prohibition for adult-use cannabis and the beginning of a highly regulated consumer staple industry, in our view.
Reinforcing Our Top Picks At the Beginning of Rec
WEED (BUY; $100 TP)  We believe that WEED will maintain its status as industry leader across a number of metrics, including: international initiatives (11 countries), intellectual property (39 patents with US patent office), inventory position, provincial supply agreements and cash on-hand. WEED has a diverse brand portfolio and has access to multiple distribution channels, enhanced by its acquisition of Hiku Brands. Put simply, in an industry that favours flexibility and aggressive growth, we like the player with $5 B of cash on-hand. WEED trades at 24.4x CY2021E EBITDA vs. Senior peers at 39.1x and 11.5x CY2020E Sales vs. Senior peers at 19.8x.
TRST (BUY; $25 TP)  We highlight TRST for its sector-leading extract sales (60%+ of total sales), multiple provincial supply agreements, and exclusive JV with Apotex (Private). TRST recently announced an LOI with the sole distributor of Diageo products in Canada, Breakthru Beverage Group (Private), to establish a cannabis-focused brokerage company and a route-to-market platform. TRST trades at 7.9x CY2021E EBITDA vs. Intermediate peers at 9.4x and 4.7x CY2020E Sales vs. Intermediate peers at 4.5x.
HEXO (BUY; $12 TP)  We highlight HEXO for its 5-year supply agreement with Quebec for an estimated 200,000 kg and its JV with Molson Coors Canada (TAP; Not Covered) to develop cannabis-infused beverages. We believe that HEXO's Molson JV and proven track record of product development will help the Company gain significant market share in the future. HEXO trades at 10.6x CY2021E EBITDA vs. Intermediate peers at 9.4x and 5x CY2020E Sales vs. Intermediate peers at 4.5x.
OGI (BUY; $12 TP)  We recognize OGI for its multiple provincial supply agreements, brand portfolio, built capacity, impressive yields and cost leadership within an indoor growing facility. The Company's international initiatives, Dealer's License and R&D initiatives round out an LP poised to capitalize on the start of rec. OGI trades at 9.6x CY2021E EBITDA vs. Intermediate peers at 9.4x and 3.9x CY2020E Sales vs. Intermediate peers at 4.5x.
EMC (BUY; $4 TP)  The 175,000 kg supply agreement with APH (BUY; $22 TP) allows EMC to "walk the talk" when it comes to moving away from farming. The ability to expand their 30,000 sq ft manufacturing and processing facility, complete with a GMP-certified lab, will be key to executing on a strategy focused on branded consumer products. EMC trades at 6x CY2021E EBITDA vs. Junior peers at 6.4x and 1.3x CY2020E Sales vs. Junior peers at 2.4x.
How Will the Space Trade Over the Next 12 Months?
We continue to recommend that investors take a tactical approach to deploying capital in the cannabis sector. We expect an increase in volatility over the next 12 months as the market reacts and adjusts its expectations accordingly to the adult-use market roll out.
We see positive industry catalysts like international de-regulation and M&A carrying the sector higher in conjunction with LPs that can execute at a high level, quarter after quarter, meeting or exceeding their provincial supply agreement figures. On the other hand, LPs that struggle to meet supply agreements, replenish inventories and fail to generate operating cash flow have the potential to disappoint investors who have adjusted their focus toward execution.
·   Q4/18  Lower  Adult-use cannabis becomes legal, Q3/18 results are reported with minimal adult-use sales, and initial adult-use hype subsides into the holiday season.
·   Q1/19  Mixed  Q4/18 results demonstrate earnings potential of rec sales; however, profitability is still out of sight. LP trading action begins to see a separation of the pack between those that are executing and those with longer-dated strategic horizons. Operational issues arise for many in an effort to keep pace with early demand. M&A rumours continue to carry the space.