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). Specifically, inefficient growers in Canada could be better suited 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 unfavourable 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.
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.”
