A strong focus on retail and leveraging its brand power are keys for US cannabis company MedMen Enterprises (MedMen Enterprises Stock Quote, Chart CSE:MMEN), according to Industrial Alliance Securities.

Analyst Nav Malik who initiated coverage of the stock on Monday with a “Buy” rating and C$6.00 target price, representing a projected return of 124.7 per cent at the time of publication.

MedMen, a California-based vertically-integrated multi-state operator, began trading on the CSE in May of last year, hitting a high of just over C$9.00 by October. Since then the stock has dropped considerably, currently trading in the high-C$2.00 range.

But Malik says that part of the stock’s weakness likely can be attributed to negative publicity related to a lawsuit filed by certain shareholders along with another its former CFO. The former was filed in January 2019 but then voluntarily dismissed in June 2019, with the shareholders now seeking arbitration, while the latter alleges a breach of employment agreement.

Malik says he likes MedMen’s position in the US where it has established high-profile stores in sough after locations such as Beverly Hills, Venice Beach, Las Vegas and New York City.

“MedMen has developed one of the most recognized brands in the cannabis industry by delivering a premium retail experience and through impactful marketing,” writes Malik. “We are forecasting strong growth as it continues to deepen its presence in key markets. In addition, MedMen is driving margins by expanding its cultivation capacity and increasing sales of products produced in-house.”

Medmen Stock Forecast

On the margin front, the analyst notes that products produced by MedMen’s own facilities are currently getting gross margins of over 80 per cent, while the sale of third-party products is resulting in gross margins of around 50 per cent. Currently, just five per cent of MedMen’s revenue comes from the sale of its own products.

“We visited a number of MedMen locations in both California and Nevada,” writes Malik. “The stores have a modern and upscale feel with attractive displays and a wide range of products (flower, vape pens, concentrates, tinctures, edibles, beverages). Tablets provide product information about strains and THC content. In addition, the staff are highly knowledgeable and offer advice and guidance to customers. MedMen’s retail experience is intended to ‘mainstream’ cannabis in an inviting, upscale, and engaging

environment.”

Malik says multiples across the US cannabis group are likely to increase as additional states legalize adult-use or expand their medical cannabis programs. The analyst sees MMEN generating fiscal 2019 revenue and EBITDA of $208.9 million and negative $169.7 million, respectively, and fiscal 2020 revenue and EBITDA of $388.5 million and negative $10.3 million, respectively. (All figures in US dollars unless noted otherwise.)

Malik says MMEN is currently trading at an EV/Sales (calendar 2020 estimate) multiple of 2.7x, which compares to its peer average at 3.7x.

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