Author: Colin Tang, B.Com
Cannabis Industry Performance
Note: MCAN and XCAN was launched on November 18, 2019 and January 20, 2020, respectively.
Over the past week, the HMMJ, MCAN, and XCAN cannabis indexes generated a return of 8%, 9%, and 10%, respectively. Due to signs of the COVID-19 pandemic slowing, and a better-than-expected May 2020 job report in the United States, investors took a risk-on approach towards equities, resulting in an uplift to cannabis stocks.The best performer this week from the list of companies that we track is HEXO Corp. (NYSE: HEXO). We are unable to ascertain the reason for HEXO’s week-over-week run-up, as there were no material press releases from HEXO over the past week. HEXO is expected to release financial results on June 11, 2020. A reason for the surge may be attributed to speculative investors buying in before the release of financials.
Valuation of Select Canadian LPs
The following shows the average Enterprise Value to Revenue (“EV/R”) of the cannabis companies that we track.
Average EV/R (October 2019 – June 2020)
The average EV/R, as of June 8, 2020, is 11.1x – an improvement from an average EV/R of 10.9x as of June 1, 2020. The average EV/R, from October 7, 2019 to date, is 12.4x. As a number of companies are not EBITDA positive, we have refrained from tracking the average Enterprise Value to EBITDA (“EV/EBITDA”).
Elon Musk and Cannabis Legalization?
Elon Musk, a highly influential individual with over 35 million Twitter (NYSE: TWTR) followers, made the following Twitter posts regarding cannabis over the weekend:
An interesting thing to acknowledge from Mr. Musk’s tweet is how far cannabis legalization has come. Since Colorado and Washington legalized cannabis for recreational purposes back in 2012, cannabis is now legalized for recreational purposes in eleven states (Source: Business Insider).
We believe the current environment (post-COVID-19) provides the perfect opportunity for more states to legalize cannabis. As we have previously discussed, the legalization of cannabis would provide states with much-needed cannabis tax revenue to offset the economic damage from the COVID-19 pandemic.
New York (fourth largest state in terms of population), a state that currently prohibits recreational cannabis, collected tax revenue of US$3.7 billion in April 2020 – significantly lower than the US$11.6 billion in the same month last year. According to Gov. Andrew Cuomo, the state currently has a US$13 billion deficit and requires US$61 billion in federal aid to avoid budget cuts to New York schools, police departments, hospitals, etc. With high unemployment rate numbers due to the COVID-19 pandemic, we believe increasing tax revenue on residents in New York would not be a feasible option. Therefore, we believe that legalizing recreational cannabis and generating tax revenue from it could be a rational alternative. The following shows the amount of tax revenue generated from cannabis in select states that have legalized recreational cannabis: As shown above, the taxation of cannabis provides a material amount of tax revenue for states. As states face short-falls in their budget, we believe the legalization of cannabis for recreational purposes will be in the limelight.
Canadian Retail Cannabis Pricing
The average retail price per gram decreased nominally from $11.51 to $11.49 – a week-over-week decrease of 0.16%.
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
Retail Cannabis Stores
As of June 8, 2020, there are 939 retail cannabis stores across Canada. This is a 2% increase from a week ago.
Number of Retail Cannabis Stores in Canada
The following shows retail cannabis stores by province/territory:
Shown above, Ontario and Quebec are the two largest underserved provinces for cannabis, with a population / store ratio of 160k and 202k, respectively. Growth in Canada’s cannabis market hinges on more retail cannabis store openings in the two aforementioned provinces.
The below chart shows Canadian retail dried cannabis flower pricing since we began price coverage.
Canadian Retail Dried Cannabis Flower Pricing
Weekly Cannabis Commentary :
Author: Colin Tang, B.Com