Weekly Cannabis Commentary:
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 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 3%, 3%, and 2%, respectively. The cannabis industry was propped up by news of a potential merger between Aphria (TSX: APHA) and Aurora (TSX: ACB). With that said, according to Bloomberg, talks broke down after both parties failed to agree on board composition and compensation for some senior executives. Nonetheless, this news outlines the fact that the cannabis industry is expected to face consolidation as the industry matures.
In addition to the above news, over the past week, Canopy (TSX: WEED) conducted an additional round of layoffs (number of layoffs undisclosed) tied to its ongoing strategic review. According to BNN Bloomberg, Canopy has reduced its workforce by at least 800 year-to-date. We are pleased to see Canopy commit to reducing its cash burn. Canopy’s trailing twelve months (“TTM”) cash flows from operating activities (“CFO”) were -$773 million (Source: Yahoo Finance).
Lastly, on July 20, 2020, Aurora announced a reorganization of its operations through laying off one-quarter of its workforce in select countries. This is part of Aurora’s restructuring plan announced in February 2020, which has already caused more than 1,000 layoffs (Source: Global News). Similar to our thoughts on Canopy, we are pleased to see Aurora commit to reducing its cash burn. Aurora’s TTM CFO were -$293 million (Source: Yahoo Finance).
Valuation of Select Canadian LPs
The following shows the average Enterprise Value to Revenue (“EV/R”) of the cannabis companies we track.
The average EV/R, as of July 20, 2020, is 11.0x – an improvement from 10.2x a week ago. The average EV/R, from October 7, 2019 to date, is 12.1x. As a number of companies are not EBITDA positive, we have refrained from tracking the average Enterprise Value to EBITDA (“EV/EBITDA”).
This week, we discuss cannabis sales in the United States.
United States Cannabis Sales
According to the 2020 Marijuana Business Factbook, the United States generated cannabis revenue in the range of US$10.6 billion to US$13 billion in 2019, topping spending on sleep aids, hard seltzer and toothpaste combined.
From the same source, the United States is expected to generate cannabis revenue in the range of US$30.2 billion to US$37 billion in 2024, reflecting a compound annual growth rate (“CAGR”) of 23%.
As a comparison, Canada’s cannabis market is expected to grow from $1.69 billion in 2019 to $6.18 billion by 2024 (Source: Arcview Market Research, BDS Analytics), reflecting a CAGR of 30%.
We speculate Canada’s higher CAGR reflects the uncertainty of federal cannabis legalization in the United States. The road to federal legalization of cannabis in the United States still remains uncertain, as the most popular Democratic candidate, Joe Biden, and the current president, Donald Trump, both have openly opposed the federal legalization of cannabis (Source: News Week).
With the 2020 United States Presidential Election on November 3, 2020, a change in opinion on the federal legalization of cannabis by Joe Biden or Donald Trump from now until election day would likely fuel a rally in cannabis stocks. With two-thirds of Americans supporting cannabis legalization (Source: Pew Research), we speculate a possibility of either individuals backtracking on their current cannabis legalization stance to garner greater votes. Furthermore, given the adverse impact of the COVID-19 pandemic on the United States’ economy, the federal legalization of cannabis may be proposed to (1) provide economic stimulus through tax revenue and (2) create more jobs.
The average retail price per gram decreased 0.46% week-over-week to reach $11.14. 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:
Canadian Retail Cannabis Stores
As of July 13, 2020, there are 1,012 retail cannabis stores across Canada – a 0.7% increase from a week ago. The following shows the week-over-week growth rates:
The following shows the number of retail cannabis stores by province/territory:
As shown above, Ontario and Quebec are the two largest underserved provinces for cannabis, with a population / store of 125k and 204k, 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.
Weekly Cannabis Commentary :
Author: Colin Tang, B.Com