Supreme Cannabis Financial Results Show Enviable Margins

The Supreme Cannabis Company (TSX:FIRE), one of the Canadian marijuana stocks, reported industry-leading gross margins and positive EBITDA during its fourth quarter 2019

SmallCapPower | September 20, 2019: The Supreme Cannabis Company Inc. (TSX:FIRE), one of the Canadian cannabis stocks, reported Q4/19 financial results after markets closed on September 16, 2019. Results were highlighted by revenue of ~$19M and adjusted EBITDA of ~$3.2M. Revenue was in-line with the consensus estimate, as management had provided guidance of ~$19M on August 13, 2019. However, adjusted EBITDA came in well above the average analyst estimate of ~$0.85M. Management is also guiding between $150M to $200M in revenue for F2020E.

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Figure 1: Summary of Supreme Cannabis Q4/19 Financial Results

Source: Company Reports, Ubika

Revenue increase 91% sequentially and gross margins (before FV adj) expand by ~1600 bps. Supreme Cannabis’ revenue was up 91% to ~$19M (was ~$9.9M during Q3/19). Supreme is now the seventh-largest Canadian cultivator in terms of revenue, behind Aurora Cannabis, Canopy Growth, MediPharm Labs, Aphria, Organigram, and Sundial Growers. Gross margins came in at ~59%, as management indicated that margin expansion was due primarily to a 50,000 sq. ft (announced May 13, 2019) increase in cultivation capacity, bringing total capacity up 230,000 sq. ft. Of note, with gross margins (before FV adj) of 59%, Supreme Cannabis has taken the industry lead for best gross margins, followed by Aurora Cannabis (56%, Q4/19) and Organigram (50%, Q3/19). That being said, Organigram had gross margins of 60% during Q2/19, but management indicated that the slip in gross margins was due to a change in plant-growing protocol and it should revert to ~60%.

Figure 2: PAX + 7ACRES

Source: Corporate Presentation

Getting ready for Cannabis 2.0, the legalization of concentrates and derivative products. Supreme Cannabis ended the quarter with ~$19M in inventory, a 2.5x increase from Q3/19. With the increased inventory position, we believe the Company had positioned itself well for Cannabis 2.0. On June 7, 2019, Supreme announced that its subsidiary, 7ACRES,  was selected as one of four Canadian cannabis companies to have a partnership with PAX Labs to create cannabis oil pods for the PAX Era (Aphria, Organigram, and Aurora being the other three companies). 7ACRES-branded vaporizer oil will be sold exclusively in Era-compatible pods. Supreme currently has an extraction tolling agreement with MediPharm Labs (TSX:LABS) for 1,000 kg of biomass annually for three years. Additionally, Supreme Cannabis’ two wholly-owned subsidiaries, Blissco and Truverra, have some extraction capabilities, albeit limited as the total size of Blissco’s facility, including cultivation, is 18,000 sq. ft and Truverra’s is 5,000 sq. ft, while MediPharm has 70,000 sq. ft of extraction space. As such, Supreme will likely have to continue to use pure-play extraction companies for tolling, however as demand for vape products increases, management is likely to develop some in-house extraction capability.

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Key Takeaways. Net revenue met consensus estimates, but adjusted EBITDA beat expectations. Supreme Cannabis has proven that it can grow premium cannabis that commands a robust margin profile and is now a top choice in the premium cannabis segment along with Organigram. Management also provided F2020E guidance. Revenue is expected to be between $150M to $200M for the year with expected positive EBITDA in aggregate over the year. Supreme Cannabis trades at F2020E EV/sales and EV/EBITDA multiples of 3.0x and 13.1x, a discount to mid-cap peers, which trade at 4.5x and 12.4x, respectively. We think this valuation gap should close, as Supreme is expected to generate significant revenue growth and profitability.

Shares of Supreme Cannabis closed Thursday’s trading session down 0.7% to C$1.39. Supreme stock trades at a market cap of about $460M.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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