GMP starts Zenabis at buy; PT $3.25

GMP Securities initiated coverage of Zenabis Global (TSX:ZENA) with a “buy” rating and price target of $3.25. The stock was quoted at $1.29 in afternoon trading on June 27.

Zenabis is a Canadian cannabis licensed producer (LP) that has an opportunity to become a top five supplier, with a valuation that is well below most peers, writes analyst Justin Keywood.

“We spoke to several of Zenabis’ partners, including government contacts, who all had exceptional regard for the company and its products,” Mr. Keywood said. “Zenabis’ quality of facilities, receptiveness of management and ethical practices were all mentioned as key criteria in a stringent partner evaluation process.”

While a financing overhang has persisted for the company, in part from an open convertible debenture, “we believe the stock is well oversold with several positive catalysts ahead,” he added.

Mr. Keywood said Zenabis’ team is also well aligned at about 53% insider ownership, along with the CEO’s compensation tied to EBITDA pershare, EPS and share price.

“As ZENA continues to execute on its growth plan, the financing overhang dissipates and a solid partner ecosystem expands, we expect valuation to re-rate higher,” he added.

Zenabis currently has licensed production capacity of 23,100 kg but with submitted amendments, its run rate is expected to increase to 32,900 kg in the third quarter of 2019.

In addition, construction at the company’s Langley, British Columbia facility is expected to be completed in the summer, with incremental capacity of 96,100 kg, which would bring the total run rate to 131,200 kg going into 2020. “This could position Zenabis as a top five Canadian LP supplier, with an option to still expand capacity further to 478,800 kg,” Mr. Keywood said.

Although most LPs have aggressive expansion plans, “our Zenabis forecasts reflect conservatism to what it is capable of achieving with Dutch horticultural expertise,” he added. “We are also comforted with the fact that Zenabis’ partner ecosystem is highly supportive and a strong entrepreneurial team will be flexible in pricing to move high quality product.”


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