The Hydropothecary Corp. (The Hydropothecary Corp. Stock Quote, Chart, News: TSXV:THCX) is uniquely positioned as a low cost producer with strong value-added product capabilities, Echelon Wealth Partners analyst Russell Stanley says.

In a research report to clients today, Stanley initiated coverage of THCX with a “Speculative Buy” rating and a one-year price target of $5.50, implying a return of 40 per cent at the time of publication.

Stanley says Gatineau based Hydropothecary has what it takes to succeed in the nascent but already competitive sector.

“We expect the forthcoming dramatic increase in the industry’s cultivation capacity to commoditize dried cannabis production,” the analyst says. “In combination with government owned, centralized distribution models in Canada’s core recreational markets, many producers will struggle in an increasingly competitive environment. We believe the best plays for investors are companies with ultra-low cost production capability and/or demonstrated strength in developing and commercializing value-added products. Based on cash costs of finished goods inventory, THCX has reduced its product cost to $0.89/gram as of last quarter, down from $1.79/gram y/y. The Company also generates 40%+ of its revenue from value-added products, two of which won first and third place, respectively, at Lift’s Canadian Cannabis Awards in November 2017. We understand that vape pens, prerolls, and topicals are priorities for product development.”

Stanley thinks THCX will generate Adjusted EBITDA of negative $12.8-million on revenue of $11.4-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $15.0-million on a topline of $97.1-million the following year.

“Our central thesis continues to be that increasing supply and centralized purchasing by government-owned distributors in core markets will pressure pricing for dried cannabis over time,” Stanley adds. “From the government’s perspective, squeezing out the illicit market requires low pricing, without pricing product so low that it effectively encourages cannabis use.”