Little Green Pharma (ASX: LGP) has received a strong vote of confidence from Canaccord Genuity, which has upgraded its rating to Speculative Buy from Hold (see research note attached). The investment bank also raised its price target from $0.17 to $0.21, citing improved revenue growth, operating leverage, and free cash flow. The positive momentum comes off the back of LGP’s robust September 2024 quarter, which could mark a transformative period for the vertically integrated medicinal cannabis company.
Key Drivers Behind the Upgrade
In its report, Canaccord highlighted several key factors underpinning its bullish outlook:
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Revenue Surge: LGP posted a 40% quarter-on-quarter (QoQ) revenue growth for the September quarter, delivering $10.2 million in revenue. This was a 65% increase on the previous corresponding period and outpaced Canaccord’s initial forecasts. The revenue gains were spread across Australia and Europe, with growth seen in both flower and oil products. LGP’s multiple brands—LGP, Cherry, and white label products—are contributing to the company’s success.
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Positive Free Cash Flow: A major highlight for the quarter was LGP’s first underlying positive free cash flow, driven by revenue growth and continued cost control. This quarter also marked the first time LGP achieved a positive operating cash flow result without relying on R&D rebates, indicating significant improvement in its underlying business operations.
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Cost Control and Operating Leverage: Despite rapid revenue growth, LGP managed to reduce its operating expenses by 9% quarter-on-quarter, driving its operating leverage. Cash operating expenses now account for just 35% of revenue, down from 66% in the prior corresponding period. Canaccord noted the efficiencies gained through economies of scale at LGP’s Denmark facility and ongoing cost-saving measures, including the subcontracting of some Australian operations.
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Stronger Balance Sheet: With $4.8 million in cash on hand and $3.7 million in debt, LGP’s balance sheet is in a stronger position. Positive cash flow should make debt servicing easier, and Canaccord believes refinancing should be straightforward if necessary.
Upbeat Outlook and New Product Launches
Canaccord remains cautious about getting ahead of forecasts due to the potential for lumpy revenue in the medicinal cannabis sector. However, it remains optimistic about LGP’s growth trajectory. Two new product launches are scheduled for the third and fourth quarters of FY25, and the company is well-positioned to benefit from regulatory changes in key European markets like Germany, France, Spain, and the UK.
If LGP can maintain flat revenue growth over the next two quarters, it would achieve full-year revenue of approximately $38 million, representing a 48% year-on-year growth.
Valuation and Price Target
The upgraded price target of $0.21 is based on a discounted cash flow (DCF) model, assuming a 10.7% WACC, a 1.5 equity beta, and a 2.5% terminal growth rate. Note: This price target is 1.7x current year revenue of $36.4m, and 14.7x forward EBITDA. Canaccord expects that LGP is trading at a FY26 EV/EBITDA multiple of 10.2x, with earnings growth expected to accelerate as the company capitalises on its vertically integrated business model.
Conclusion
LGP’s strong September quarter, combined with positive free cash flow and continued revenue growth, has positioned the company as a promising player in the medicinal cannabis space. Canaccord’s upgrade to Speculative Buy reflects confidence in LGP’s ability to sustain growth and improve margins, especially as it expands its product offerings and benefits from changing market dynamics in Europe.
Investors will be watching closely as LGP enters the next phase of its growth, with an eye on how the company manages further product launches and maintains its operational momentum.
Contact details:
David Tasker
T: +61 433 112 936
E: dtasker@chapteroneadvisors.com.au
