Equity Research Healthcare – Cannabis | January 18, 2019
Patrick Smith | Analyst | Ubika Research Patrick@UbikaResearch.com | (647) 444-5506
Christopher Bednarz | Associate | Chris.B@UbikaResearch.com | (416) 558-5548
Company Description: LABS focuses on cannabis oil extraction. The Company operates a cGMP facility and ISO-9000-rated laboratory clean rooms in Barrie, Ontario. Due to its differentiatedfocused extracts-only business strategy, MediPharm acts as a strategic partner to any LP, providing both white-label production and contract processing. LABS is expanding globally and is currently developing an extraction facility in Australia, expected to be completed in 2H/2019.
MediPharm Labs Corp. TSXV:LABS
(Currency is C$, unless noted otherwise)
Last Price (as at close 18-Jan-2018) $1.96
RatingN/R
Target PriceN/R
52 Week High $2.36
Current Share Price % 52-week high83%
52 Week Low$1.20
Current Share Price % 52-week low163%
30-Day Average Daily Volume200.7K
Company Headquarters Barrie, ON, Canada
Company Website www.medipharmlabs.com
Management Team
Patrick McCutcheon President & CEO
Christopher Hobbs CFO
David MayersCOO
Sybil Taylor CMO
Keith StrachanVP Business Development
MAJOR SHAREHOLDERS
Management and Insiders (9.5%), Mirae Asset Global Investments (1.1%)
| Capitalization | Basic | Diluted |
|---|---|---|
| Shares Outstanding (M) | 97.5M | 131.6M |
| Market Capitalization ($M) | $191.1 | |
| Enterprise Value ($M) | $186.7 | |
| Cash Balance ($M) | $6.4 | |
| Total Debt ($M) | $2.0 | |
| Relative Valuation | EV/Revenue 2019E | EV/Revenue 2020E |
| MediPharm Labs Corp* | 1.7x | 1.1x |
| Oil Extractors** | 11.4x | 5.2x |
| CAN-Based Major Cultivators | 11.5x | 8.2x |
| CAN-US Based Operations | 2.8x | 1.8x |
| **(TSX:NEPT & CNSX:CURA) |
MediPharm Labs: Share Price Performance
First $10M Oil Shipments Gives a Taste of Lucrative Future
On January 16, 2019, MediPharm Labs Corp. announced that its first oil shipments were sold in December for $10M. This follows a news release on November 12, 2018, when the Company announced it had 180 kg of cannabis extract in inventory. As well, on January 10, LABS reported that they had purchased an additional 1,600 kg of dried product, implying quick inventory turnover and material revenue, booked in Q4/18.
Other Recent News
- Solid start for 2019 – MediPharm Labs signs a three-year extraction agreement with TerrAscend Corp (CSE:TER, $5.96 | N/R). Under the terms of the agreement, TerrAscend will supply bulk quantities of dried cannabis to MediPharm for processing, on a fee for service basis, into cannabis resin or other premium products, derived from cannabis oil. TerrAscend is currently operating an ~18,000 sq. ft facility in Mississauga, ON, yielding ~1,000 kg annually. TerrAscend is presently in the process of building out an additional 41,000 sq. ft, which is expected to yield between 1,500 – 2,000 kg.
- On December 24, MediPharm completed Phase I of its expansion, increasing annual production capacity to 150,000 kg from 100,000 kg. With the expansion, the Company has added two additional extraction lines, which can produce up to 6,500 kg of resin annually (equivalent to about 9.7M vape pens), bringing the facility to a total of five extraction lines. The Company is anticipating regulatory approvals from Health Canada to further increase its production capacity to 250,000 kg, which is expected to be completed by Q2/19. The completion of Phase 2 in Q2/19 should further strengthen MediPharm’s extraction capacities in Canada and positions the Company to meet the significant demand for cannabis oil in Canada.
Valuation
- Trades at a discount to peers. Based on our preliminary revenue estimates of ~$110M for 2019 (25% utilization), the Company trades at a 1.7x EV/ revenue multiple, compared with oil extractors, Canadian majors, and U.S. based peer companies, which trade at a consensus average of 11.8x, 11.4x, and 2.8x 2019E, respectively. For the following year, once the expansion is complete, if we assume 25% utilization of 150,000 kg dry flower capacity, this implies potential revenue of $165M for 2020; once again equating a discount to peers, implying a multiple of 1.1x, (same peers), which trade at 5.4x, 8.2x, and 1.8x 2020E, respectively.
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