A Canadian bank has expanded its coverage of the marijuana sector with new ratings for a collection of established producers.
On Monday (September 23), John Zamparo, equity research analyst at CIBC Capital Markets, kicked off his coverage of Aurora Cannabis (NYSE:ACB,TSX:ACB), The Supreme Cannabis Company (TSX:FIRE,OTCQX:SPRWF) and Organigram Holdings (NASDAQ:OGI,TSXV:OGI).
The analyst awarded Supreme Cannabis and Organigram with “outperformer” ratings, while Aurora obtained a “neutral” rating for its stock.
The analyst issued a 12 to 18 month price target for Aurora of C$7. Supreme Cannabis earned a C$2 price projection, while Organigram was awarded a C$9 target.
While Zamparo commended Aurora’s clear leading presence in the Canadian cannabis market, the analyst wants to see some improvements from the company moving forward.
“At Aurora’s valuation (second largest among the cannabis names), we wish to see greater balance sheet strength, the presence of key strategic partners or material exposure to the US CBD market,” Zamparo wrote in his note to investors.
Zamparo also issued a warning to investors for some pressure on the stock due to increased dilution for the repayment of a convertible debenture. “Further non-dilutive financing is possible, but Aurora’s credit line has already been expanded, and asset sales may be challenging to execute,” he wrote.
In his praise of Supreme Cannabis, the analyst recognized 7ACRES, the firm’s operational brand, as one of the only brands to have significantly been recognized by consumers nearly a year after adult-use legalization in the country.
“Supreme Cannabis’ focus on existing, premium-seeking consumers may be the most effective and yet somehow neglected strategy in the adult-use cannabis space,” he wrote.
Zamparo said in his view the company has the potential to be among the top five cannabis players in the next two to three years.
According to the analyst, Organigram offers one of the only reasonable prices of entry for investors to gain exposure into the sector.
The researcher said Organigram has an advantage because of investors’ preference for companies with positive earnings before interest, tax, depreciation and amortization.
“Despite being one of the earliest licensed producers (LP) in Canada, we believe Organigram suffers from relative obscurity versus its peers because of its geography and focus on execution rather than promotion,” he wrote.
Zamparo was a featured speaker at the recent MoneyShow event in Toronto. In a panel alongside Horizons ETFs Management (Canada) CEO Steve Hawkins, the analyst explored the dueling nature of the Canadian and US cannabis investment markets.
Giving a long-term projection, Zamparo said the US market will be able to leverage the power of its brand appeal at an international scale, while Canada will most likely export its knowledge based on its early start after recreational legalization in 2018.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.