Premium bud-grower Supreme Cannabis Company (FIRE:TSXV) is in line to distinguish itself from the herd of cannabis contenders, says Robert Fagan of GMP Securities, who Thursday initiated coverage of Supreme with a “Buy” rating.

Tiny Kincardine, Ontario, on the shores of Lake Huron is home to Supreme Cannabis, formerly known as Supreme Pharmaceuticals, a licensed producer who aims to become Canada’s largest B2B cannabis seller. With a current market cap of $515 million and a target capacity of 50,000 kg within the next two years, Supreme may not be getting the attention that other players like Canopy Growth and Aurora Cannabis are, but its numbers are looking good, says Fagan.

“Supreme has positioned itself as a business-to-business (B2B) focused LP, with revenues generated through bulk sales to other legal retailers,” says the analyst in the initiating coverage report on February 8. “This has required less investment in infrastructure to serve medical patients, and translated into a relatively low base of invested capital. As a result, Supreme generated ~50% higher output per $ invested (at Q4/CY17) than the average of the industry’s largest players. In our view this highlights a track record of efficient capital allocation.”

Fagan also likes Supreme’s business model of focusing on higher-end marijuana cultivation, which he projects will be a sought-after commodity once legalization of recreational cannabis comes into effect.

“The trend towards low-cost greenhouse growing, combined with few players having yet to launch products targeted at the ultra-premium dried flower segment, suggests potential for a less crowded market segment, and we believe the majority of recreational volumes in Canada are driven by heavy-users of dried flower who tend to be more sensitive to quality than price,” the analyst says. “This suggests a significant portion of consumers are willing to pay for quality, which bodes well for the potential size of the ultra-premium flower segment in our view.”

Supreme is also one of the more efficient operators around, says Fagan. “Supreme reported its first revenues in Q3/CY17 and incurred SG&A of only ~$5/gram, which would rank the company as one of the industry’s leanest operators in our view,” the analyst says. “As capacity expands, we expect Supreme to benefit meaningfully from scale efficiencies driving SG&A down to below $1.25/gram by mid-2019. This positions Supreme to generate strong future EBITDA torque, on par with the industry’s most profitable companies currently.”

Fagan estimates Supreme will generate EBITDA of negative $5.7-million on revenue of $9.6-million in 2018, EBITDA of $17.1-million on revenue of $69.2-million in 2019 and EBITDA of $69.0-million on revenue of $185.9-million in 2020.

The analyst’s coverage has a “Buy” rating for Supreme with a target price of $3.50 representing a projected return of 59.1 per cent at time of publication.