Vertically-integrated US cannabis company Indus Holdings (Indus Holdings Stock Quote, Chart CSE:INDS) checks all the right boxes, according to Doug Cooper, analyst for Beacon Securities, who on Monday launched coverage of the stock with a “Buy” rating and C$22.50 target, saying the name represents an excellent risk-return proposition for investors.

Cooper says that California-based Indus is well-positioned in the largest cannabis market in the world, with the expectation being that there is more room to grow in the state as the market matures and siphons more dollars from illicit trade.

“Indus is already a leading player in [California] and we would expect it both to grow as the number of dispensaries grows and as it sells more product to each dispensary. Such strong organic growth may be augmented through targeted M&A in neighboring states such as Nevada that represent excellent cross marketing/cross branding opportunities. Despite the size and importance of the California market, the major MSOs do not have a material presence there, albeit that is changing through recent M&A activity. We believe Indus’ infrastructure and valuation (less than 20 per cent that of a recent industry take-out of a similar size), make it a compelling proposition for industry players,” says Cooper.

The analyst highlights a number of positives about the company and stock, including its management steeped in experience in the CPG industry, Indus’ $30-million in cash (representing 20 per cent of its current market cap), its already-built infrastructure and distribution networks, and a discounted share price. On the latter, Cooper estimates that INDS is trading at 0.5x his fiscal 2020 sales estimate and 2.4x his EBITDA estimate, levels which he calls depressed and reflective of a market which is not overly optimistic about Indus’ growth opportunities.

“Given the 34 million basic shares outstanding and a recent price of C$6.00, the stock is trading at 2.4x our FY20 EBITDA forecast. Clearly, the ‘mind of the market’ does not believe that it can achieve such a forecast, especially given the US peer group trades at an average of 12x or a whopping 5x the valuation of Indus. As we have shown, we believe such a mindset of the market is wrong. Nevertheless, with such expectations being so low, it further skews the risk-return in investors’ favour,” says Cooper.

The analyst thinks Indus will generate fiscal 2019 revenue and EBITDA of $68.3 million and $3.1 million, respectively, and fiscal 2020 revenue and EBITDA of $228.0 million and $51.3 million, respectively. (All figures in US dollars unless noted otherwise.) Cooper’s C$22.50 target represents a projected return of 276 per cent at the time of publication.

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