This Small Cannabis Stock is Expected to Become One of Canada’s “Top Five” Producers

Zenabis Global
Zenabis Global Inc. Opens the Market (CNW Group/TMX Group Limited)

While there’s plenty of room for growth in the cannabis sector, it’s hard to imagine that the current reigning champions of the marijuana industry could be dethroned by an upstart that few have heard of before.

However, that’s exactly what one analyst has said on Thursday, picking this relatively unheard-of company as one of his top recommendations for investors.

Zenabis Global (TSX: ZENA), a company with a C$350 million market capitalization, was handpicked by GMP Securities analyst Justin Keywood, who began coverage of Zenabis with a “buy” recommendation. Going on to say that the company has the potential to become a top-five supplier in the Canadian marijuana market, Keywood has a 12-month price target at $3.25 per share.

The company was first formed from a merger between Bevo Agro and SunPharm in a reverse takeover in January 2019. Since then, Zenabis has taken over Bevo’s plant propagation business, and in the eyes of the analyst, looks like a promising long-term investment despite the company’s stock price falling over the past six months.

“We see ZENA as becoming a top five Canadian LP with its shares substantially undervalued at ~7x EBITDA, in part from a complicated capital structure. We spoke to several of ZENA’s partners, including government contacts at the distribution level in different provinces and the feedback was unanimously positive. Contacts described ZENA’s quality of operations as one of the best when compared to other LPs and spoke to the high ethics of management and solid relationships in place. This bodes well in an industry going through rapid transition, where we see competitive advantages in high-quality producers with strong reputations and partnerships,” writes Keywood. “Although a short-term financing overhang exists, we see the stock as being oversold for the current capital structure with a clear path to our $3.25 target.”

Zenabis, which a current production capacity of 23,100 kilograms, has expansion plans to increase its output to 131,200 kilograms by 2020 and has an option to expand that to as much as 478,800 kilograms under the best-case scenario.

Under such a case, that would put Zenabis with enough production capacity to get close to rivaling some of the largest producers in the world, like Aurora Cannabis (NYSE: ACB) and Canopy Growth Corp (NYSE: CGC). Keywood also expects Zenabis to see a fiscal 2019 revenue of $100.1 million, and 2020 revenues of up to $261.6 million.

Shares of Zenabis Global jumped up by around 7 percent in response to the recommendation, a rather small increase for such a big endorsement but understandable given the fact that the company is still relatively obscure.

However, taking a look back at a six-month chart, Zenabis had seen a drastic decline. While the stock first surged in late 2018 from C$2 to over C$6 per share, the stock has steady tumbled since undergoing a reverse takeover, failing to recover in Q1 2019 like most other cannabis stocks. Since then, the company has lost almost 75 percent of its stock price, falling now well below its 2018 lows.

Time will tell whether this small cannabis company will become as large as Keywood expects it to be. However, long-term investors might find it worth it to pick up a few shares, especially as the stock remains fairly cheap at the moment.