Supreme Cannabis Company Inc (TSE: FIRE) is in the thick of a minor correction since late March. However, our last update noted that the company’s stock is destined for new highs. In this analysis, we discuss why investors should give the stock a second look.
TSE: FIRE Share Price Analysis
Despite the fact that Supreme Cannabis is relatively new in the industry, it is already the eighth best in Canada. Most of the good performance comes down to good management and a robust momentum for the stock. In particular, the B2B business strategy is certainly working well for the company. The company is also one of those who have gained from the general growth of the cannabis market.
Generally, the FIRE stock has performed well so far. The stock rose steadily until it touched the year’s high at CAD 2.30 in late March. To be sure, the stock is up 8.73% year-to-date, and room for expansion is plenty.
In mid-May, FIRE’s earnings results for Q3 FY2019 came out, and the numbers were rosy. In particular, revenue was up 382% year-on-year during the quarter. According to the company, the revenue grew on the back of increased productivity of a key asset, the 7ACRES facility. In addition, the company experienced higher demand for dry cannabis flower as well as positive growth in the average price of premium cannabis flower. To be sure, this price shot 26% YoY during the quarter.
Owing to the increased production costs, brought about by expansion activities, the company reported a net loss in the region of $7.1 million. On the contrary, the net loss for the same quarter FY2018 was lower at $3.4 million.
Therefore, it is clear that the market was more sensitive to the net loss than the growth in revenue. However, the fundamentals indicate that the company has a strong long term strategy and that the growth potential is robust.
About Supreme Cannabis
FIRE is among the ten best cannabis companies in Canada with a diversified portfolio across the globe. The company has interests in individual cannabis companies and also sells branded products in the cannabis ecosystem. Notably, the business model is focused on allocating capital to products with high quality and great potential for long term sustainability. In particular, FIRE owns the 7ACRES brand, which has curved its place in the industry as a producer and retailer of high-quality premium cannabis flower. Other subsidiaries include Cambium Plant Sciences and Southern Africa-based Medigrow Lesotho. The company also pursues common interests with Khalifa Kush Enterprises operating in Canada.
Q3 FY2019 Financial Results
The financial position of a company is very crucial to the market sentiment for its stock. On May 13, Supreme Cannabis announced its financial position during the third quarter of the current financial year. In the results, FIRE focused on two major markets; the adult use market and the wholesale market.
In the adult use market, the company reported that 7ACRES opened supply channels in new markets in Saskatchewan and New Brunswick. As such, the company now has eight provinces covered in its distribution chain. Following the expansion, sales revenue grew 63%.
The wholesale market benefited from 7ACRES’ bulk-packaging mechanism, for starters, the wholesale market in the cannabis industry is facing challenges due to packaging. In September 2018, the subsidiary entered an agreement with Tilray Canada involving the supply of dried cannabis. The subsidiary kept its word on the agreement during Q3 FY2019, and it will continue to supply the products.
In mid-May, the company acquired BlissCo Cannabis Corp, which has interests in wellness cannabis. Reportedly, Supreme Cannabis forked out CAD 48 million in stocks where one BlissCo share exchanged for 0.24 of the FIRE common stock. The acquisition gives FIRE access to a larger market and a wider range of high-quality products. Also, the company will leverage the expanded management expertise, expanded cannabis production capacity and, product commercializing network to grow its revenue.
Additional flower rooms for 7ACRES
Since May 13, 7ACRES has official clearance from Health Canada to add five more flowering rooms. Initially, the Supreme Cannabis subsidiary had 180,000 sq. Ft. of flowering room. The additional 50,000 sq. Ft. which resulted from the clearance will allow the company to produce larger quantities of dried cannabis flower. The primary endpoint is increased revenues to offset the expenditure on production capacity expansion.
Similar to our last update for TSE: FIRE, our analysis points to a robust positive trajectory for the stock. In particular, the current correction is simply an overreaction of the market to the huge net loss which the company reported in the third quarter of this financial year.
Looking at the recent developments, the company has a sound long term strategy and once the market prices it in, the stock should break beyond this year’s high of C$2.30 before end of the year 2019.
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Disclosure: We have no position in TSE: FIRE and have not been compensated for this article.