$3.80 target
Investment Highlights
• Quality product will likely appeal to patients. We believe Emblem is positioned for faster growth through its GrowWise clinics. Further, we believe Emblem’s high-quality product is likely to provide more consistent medical benefit to these ‘sticky’ customers.
• Novel formulations could command premium pricing. We believe that Emblem’s pharma strategy is a key differentiator. Improved convenience and tighter dosing is likely to reduce the amount of drug required and increase patient compliance; as a result, we believe that Emblem could achieve substantially higher pricing.
• Medical creates a strong foundation for our valuation. We believe Emblem’s medical focus suggests a more stable foundation to our valuation. Because the medical cannabis market already exists, we see lower risk to the company’s projected cash flows. Based on our DCF analysis, we value this business alone at $3.28 per share.
Valuation
We value the medical cannabis market based on a DCF model, using a 16.0% WACC and 3.0% terminal growth: the higher-risk rec opportunity is valued using a probability-weighted NPV. Despite the miss, our target price remains C$3.80 as Emblem’s projected peak capacity and pharmaceutical strategy remains intact. Our target represents a 55.1% projected annualized return and supports our SPECULATIVE BUY rating.
Emblem trades at 9.7x its projected funded capacity, compared to peers at 8.4x. However, we believe Emblem’s medical focus, product mix, and premium pricing support a higher multiple. Although the company is awaiting Health Canada approval to sell cannabis oil, we believe this could be a significant catalyst for investors in the near term.
