Author: Colin Tang, B.Com

Cannabis Industry Performance

MCAN and XCAN Companies

Source: TMX Money, FRC

Over the past week, the Horizons Marijuana Life Sciences ETF (TSX: HMMJ / “HMMJ”), the Standard & Poor’s/MX International Cannabis Index (“MCAN”), and the Standard & Poor’s/TSX Cannabis Index (“XCAN”) generated a return of -2%, -1%, and -3%, respectively. 

The worst performer on the list of companies that we track is HEXO Corp. (NYSE: HEXO). On June 17, 2020, HEXO closed the sale of its Niagara, Ontario facility for proceeds of $10.25 million. According to The Deep Dive, the property was acquired as part of the Newstrike Brands acquisition one year ago. The value of the acquisition was $262 million, with property, plant and equipment (“PPE”) valued at $46 million (the value attributed specifically to the Niagara facility was undisclosed). Furthermore, HEXO lost its spot on the S&P/TSX Composite Index today due to not having a minimum average price of $1 over the previous three months.

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)

Source: S&P Capital IQ, FRC

Cannabis Companies

Source: S&P Capital IQ, FRC

The average EV/R, as of June 22, 2020, is 10.7x – a slight deterioration from an average EV/R of 10.9x as of June 15, 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”).

Below, we discuss the highly anticipated retail sales numbers in Canada.

April 2020 Retail Sales in Canada

Retail sales in Canada for the month of April 2020 were $34.7 billion – a 26% month-over-month (“MoM”) decrease and a 33% year-over-year (“YoY”) decrease.

Retail sales in Canada for the month of April 2020 chart

Source: Statistics Canada

The least impacted, on a percentage basis, were food and beverage stores (unsurprisingly). Consistent with our thesis that cannabis sales are highly resilient to an economic downturn, cannabis stores only declined 1% MoM. Given that March 2020 and April 2020 has 31 days and 30 days, respectively, retail cannabis sales actually increased 3% MoM when comparing average sales per day.   

We believe April 2020 retail cannabis sales figures are impressive, considering the following headwinds:

  • Ontario cannabis stores were forced to close in early April 2020 after removal from the “essential” list (this decision was reversed later in the month) – Ontario houses 39% of Canada’s population,
  • The unemployment rate in April 2020 was 13% – indicating lower household discretionary spending; CERB payments are unlikely to offset the total lost income of those affected, and
  • The lack of international tourism to Canada due to border shutdowns, and provincial travel restrictions – in the state of Nevada (a tourism heavy state), cannabis sales dropped 30% from March 2020 to April 2020 (Source: Marijuana Business Daily). 

Given that Canada has been continually increasing the number of retail cannabis stores throughout the country (discussed later), and the additional day in May 2020 (31 days versus 30 days in April 2020), we believe that retail cannabis sales in May 2020 will be higher than April 2020. May 2020 retail sales are expected to be published on July 21, 2020, to which we will provide an update.

If we assume zero seasonality flat-line growth from April 2020 onwards, Canada’s retail cannabis market is expected to reach $2.1 billion in 2020 – a 76% YoY increase from 2019. 

Retail Cannabis Sales in Canada

Retail Cannabis Sales in Canada

Our outlook on Canada’s recreational cannabis market remains positive.

Canadian Retail Cannabis Pricing

Canadian Retail Cannabis Pricing

Source: Online Provincial Cannabis Stores, FRC

The average retail price per gram decreased 0.46% week-over-week to $11.43. Over 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 per gram price of illegal cannabis in Q4-2019 was $5.73. The following shows the trend in pricing for illegal cannabis:

Illegal Cannabis Pricing

Illegal Cannabis Pricing

Source: Statistics Canada, FRC

Retail Cannabis Stores

As of June 22, 2020, there are 955 retail cannabis stores across Canada. This is a 1% increase from a week ago.

Number of Retail Cannabis Stores in Canada

Number of Retail Cannabis Stores in Canada

Source: Provincial Websites, FRC

The following shows the number of retail cannabis stores by province/territory:

Source: Provincial Websites, FRC

As shown above, Ontario and Quebec are the two largest underserved provinces for cannabis, with a population / store of 157k 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

Canadian Retail Dried Cannabis Flower Pricing

Source: Online Provincial Cannabis Stores, FRC

Source: Online Provincial Cannabis Stores, FRC

Weekly Cannabis Commentary :

Author: Colin Tang, B.Com

Source: https://www.researchfrc.com//weekly-cannabis-commentary-37/