Author: Colin Tang, B.Com

Cannabis Industry Performance

As a proxy for performance of the cannabis market, we show the performances of:

  • Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ / “HMMJ”),
  • Standard & Poor’s/MX International Cannabis Index (“MCAN”),
  • Standard & Poor’s/TSX Cannabis Index (“XCAN”).

Source: TMX Money, FRC

Note: MCAN and XCAN was launched on November 18, 2019 and January 20, 2020, respectively.

Over the past week, the HMMJ, MCAN, and XCAN generated a return of 19%, 17%, and 20%, respectively. Performance of the cannabis market improved week-over-week due to (1) growing speculation that more U.S. states will support cannabis legalization as a means to generate tax revenue and (2) strong retail cannabis sales in Canada for the month of March 2020 (discussed further below).

Last week, the governor of New York (Andrew Cuomo) stated his desire to legalize recreational cannabis as a way to generate revenue for economic relief rather than depend on federal funds. The legalization of recreational cannabis in New York is expected to create a domino effect for recreational cannabis legalization in other states. A significant number of states have yet to legalize recreational cannabis, as shown below.

 Of the companies that we track, HEXO Corp. (NYSE: HEXO) was the worst performer due to a dilutive capital raise on May 19, 2020.

Hexo Corp.

hexo corp chart

Source: Google

Valuation of Select Canadian LPs

The following shows the average Enterprise Value to Revenue (“EV/R”) that the aforementioned cannabis companies are currently trading at

Average EV/R (October 2019 – May 2020)

Average EV/R chart

Source: S&P Capital IQ, FRC

Source: S&P Capital IQ, FRC

The average EV/R, as of May 25, 2020, is 11.5x – a improvement from an average EV/R of 8.4x as of May 19, 2020. The average EV/R, from October 7, 2019 to date, is 12.5x. As a number of companies are not EBITDA positive, we have refrained from tracking the average Enterprise Value to EBITDA (“EV/EBITDA”).

Below, we discuss Canadian cannabis retail sales.

Retail Cannabis Sales Exceeding Retail Alcohol Sales

Due to the COVID-19 pandemic, overall Canadian retail sales declined 10% month-over-month (“MoM”) from February 2020 to March 2020. However, over the same period, Canadian retail cannabis sales increased 19% MoM. From March 2019 to March 2020, Canadian retail cannabis sales increased 197%. The following shows how retail sales of different Canadian industries performed from February 2020 to March 2020.

Source: Statistics Canada, FRC (figures above in 000’s)

The best performers were grocery stores, which saw a 25% MoM increase (this is unsurprising to see). Cannabis stores were the second best-performer – a tick above beer, wine and liquor stores. This is interesting to see and supports our thesis that cannabis sales are likely to closely follow alcohol sales during an economic downturn (i.e. increase).

Although it is unclear what percentage of the increase is attributed to hoarding, the data is supportive of resilient cannabis demand during an economic downturn. Major cannabis companies have indicated that cannabis sales in April 2020 have largely come down to pre-COVID-19 levels. To that, we believe cannabis sales in April 2020 will soften compared to March 2020. If we assume sales in the remaining months of 2020 will mimic that of February 2020 (i.e. pre-COVID-19 sales), the cannabis market, assuming zero monthly growth, is expected to grow 54% from 2019 to 2020. This is an extremely attractive growth rate and outlines the huge potential of cannabis.

The following shows Canadian retail cannabis sales since legalization in October 2018.

Canadian Retail Cannabis Sales

Source: Statistics Canada, FRC

Canadian Retail Cannabis Pricing

Source: Online Provincial Cannabis Stores, FRC

The average retail price per gram increased nominally from $11.49 to $11.50 – a week-over-week increase of 0.07%.

In the long-term, we continue to reiterate our view that the retail price per gram of cannabis will decrease to combat the black market for cannabis. According to Statistics Canada, the average price of illegal cannabis in Q4-2019 was $5.73. The following shows the trend in pricing for illegal cannabis:

Illegal Cannabis Pricing

Source: Statistics Canada, FRC

Canadian Retail Cannabis Pricing

As of May 25, 2020, there are 910 retail cannabis store across Canada. This is a 1% increase from a week ago.

Number of Retail Cannabis Stores in Canada

Source: Provincial Websites, FRC

The following shows retail cannabis stores by province/territory:

Source: Provincial Websites, FRC

Growth in Canada’s cannabis market hinges on more retail cannabis store openings in Ontario, which is currently the most underserved province in terms of population to store.

The below chart shows Canadian retail dried cannabis flower pricing since we began

price coverage.  

Canadian Retail Dried Cannabis Flower Pricing

Source: Online Provincial Cannabis Stores, FRC