MKM Partners says Flora Growth ‘solves the biggest challenge’ for Canadian LPs, sees upside to $6 per share

MKM Partners’ Williams Kirk initiated coverage of Flora Growth Corp (NASDAQ: FLGC) on Tuesday with a ‘Buy’ rating. The senior research analyst has a price target of $6.00 per share on FLGC which implies the stock could nearly double from current levels. 

Canadian LPs are at a major disadvantage 

Flora Growth Corp is a global pioneer of all-outdoor cannabis cultivation that “solves the biggest challenge” for Canadian Licensed Producers (LPs), the analyst wrote in the Tuesday note. Specifically, inefficient growers in Canada could be better off sourcing from Flora as it can sell quality cannabis at a nearly 80% discount to Canadian growers.

Canadian growers boast minimal pricing power as cultivating cannabis in an unfavorable climate is associated with higher costs. Consequently, they are restricted from lowering prices to meet demand. By contrast, Flora Growth’s outdoor operations are located in Colombia where snowstorms and minus 40 degrees Fahrenheit temperature spells are non-existent.

Flora also benefits from lower labor costs. The research firm estimates Flora’s costs at 20 cents a gram including packaging and transport versus Canadian growers that “struggle” to achieve a $2 per gram cost.

“This allows Flora to deliver strong margins AND offer product at below-market prices. Flora can offer the market $1.00/gram at ~80% margin, which puts Canadians at negative gross margin to compete.”

Flora can be a friend to Canadian LPs, not a foe

Canadian LPs can get tremendous financial benefits if they purchase products from Flora Growth without a compromise on quality. A Canadian player could improve their margins from 35% to 80% simply by buying products from Flora at 50 cents a gram. The analyst wrote:

“Climate and labor are a distinct advantage and offer Canadian LPs with operations in Europe an obvious incentive to simply buy product from Flora rather than compete.”

Encouragingly, the European market can expand to 10 times the size of the current Canadian market and Flora boasts a 50% discount in cost versus the premier European growers. Access to the European market is more complex as Flora does not have all the necessary licensing in place. But it does have a partnership with a company named Hoshi that expects to receive the necessary GMP certification shortly. As such, the research firm expects Flora to ultimately be “particularly competitive” in Europe.

Finally, Colombia has a strict export quota system in place that disables countrywide producers from exporting cannabis without limitations. The quota, according to MKM Partners, could be relaxed in the future, broadening prospects further for Flora Growth Corp.

“The dramatic cost advantages in Colombia offer economic and consumer incentives that history shows us will be hard to resist,” the analyst wrote.