Author: Colin Tang, B.Com

Market 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”).
Performance of the cannabis market of the following companies:•Horizons Marijuana, Standard & Poor’s/MX international, Standard & Poor’s/TSX

Source: FRC, Google

Over the past week, the HMMJ, MCAN, and XCAN generated a return of -5%, -4% and -5%, respectively. The cannabis market took a breather over the past week from double digit gains in the week prior.

On April 3, 2020, the province of Ontario removed cannabis retail stores from the essential businesses list. The discrepancy amongst Canadian provinces regarding whether cannabis is essential is likely to weigh on cannabis sentiment. According to the Financial Post, cannabis is still part of the essential services lists in Quebec, British Columbia, and several states in the United States.

On March 31, 2020, CannTrust Holdings Inc. (TSX: TRST) filed for bankruptcy protection. CannTrust was caught growing cannabis in unlicensed areas roughly nine months ago and has failed to recover since. Moving forward, we are removing CannTrust from the list of cannabis companies that we track.

Valuation of Select Canadian Licensed Producers

The following shows the average Enterprise Value to Revenue (“EV/R”) multiple that select Canadian Licensed Producers (“LPs”) are trading at. The companies used are outlined further below.

Average EV/R

Source: FRC, S&P Capital IQ

 

The average EV/R, as of April 6, 2020, was 7.5x – a deterioration from an average EV/R of 9.4x as of March 30, 2020. The average EV/R, from October 7, 2019 to date, is 13.5x. As a number of companies are not EBITDA positive, we have refrained from tracking the average Enterprise Value to EBITDA (“EV/EBITDA”) multiple.

This week, we discuss bankruptcies in the cannabis market.

Bankruptcies Hitting the Market

Over the past months, we have outlined the need for cannabis companies to attain profitability (i.e. operating INCOME) and stated that the cannabis market is likely to face a string of company bankruptcies in 2020.

With 2019 cannabis sales failing to live up to investor expectations, and the current COVID-19 outbreak, financing in the cannabis market has completely dried up. According to Viridian Capital Advisors, capital raises amounted to US$5.6 million for the week ended March 27, 2020, compared to US$169 million over the same period last year.

The lack of financing in the space has hit numerous cannabis companies. Over the last week, in addition to CannTrust filing for bankruptcy protection, James E. Wagner Cultivation Corp. (TSXV: JWCA.H) filed for bankruptcy protection and iAnthus Capital Holdings Inc. (CSX: IAN) defaulted on its debt.

We note that the rise of bankruptcies is not likely to give rise to bailouts through mergers and acquisitions (“M&A”) by well-capitalized cannabis companies. Although valuations are low, cannabis companies are currently being extremely cautious on deciding what to spend their cash position on. For example, on March 26, 2020, Harvest Health & Recreation (CSX: HARV) terminated a US$850 million acquisition of Verano Holdings due to prevailing market conditions.

When making cannabis investment decisions, we urge readers to look at, amongst other things, the cash position of the company in question, their liquidity ratios and their cash burn rate. Given the lack of financing in the space, readers should avoid investing in cannabis companies with a significant cash burn rate and a low current ratio.

Canadian Retail Cannabis Pricing

Source: Online Provincial Cannabis Stores, FRC

Average retail price per gram decreased nominally from $11.56 to $11.52 – a week-over-week decline of 0.35%. Over the past week, Nunavut and Prince Edward Island witnessed the greatest decline in their average price per gram – 3.7% and 0.9%, respectively.

Given the current COVID-19 outbreak and the resulting increase in demand for cannabis, we were surprised to see a pricing decrease. We speculate that the pricing decreases in the aforementioned provinces were done to encourage consumers to stay at home by providing them with cheaper cannabis to past the time.

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:

Canadian Retail Cannabis Stores

As of April 6, 2020, there are 848 retail cannabis stores open throughout Canada. This is a 0.5% increase from a week ago.

The following shows retail cannabis stores by province/territory:

Source: Provincial Websites, FRC

Going forward, we expect the number of retail cannabis stores in Canada to continually grow. Ontario and Quebec remain the two largest underserved cannabis markets in terms of population to cannabis retail stores.

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

Source: FRC, Online Provincial Cannabis Stores