Weekly Cannabis Commentary
Author: Sid Rajeev, Iftekhar Mahmud
Cannabis Industry Performance
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 returns of 0%, 2%, and 0%, respectively.
On December 11, 2020, Health Canada opened a 30-day public opinion forum to get inputs for the Cannabis Act. We expect rules of packaging and advertisement to be among the key issues that would be considered for review. In 2021, with more U.S. states legalizing cannabis, and an increasing number of European countries opening up medical cannabis use, we anticipate M&A activities to increase as larger companies try to gain market share amid a rapidly changing industry landscape. We note that Aphria’s proposed acquisition of Tilray is at an EV/R multiple of 10x vs the sector median of 7x. Our top picks list includes two cannabis companies – Inner Spirit Holdings (CSE: ISH) and Delta 9 Cannabis (TSX: DN) – they are trading at just 2.5x and 1.7x, respectively.
Valuation of Select Canadian LPs
The following chart shows the average Enterprise Value to Revenue (“EV/R”) ratio of the Canadian cannabis companies we track.
The average EV/R, as of December 24, 2020, was 14.6x – a WoW decrease from 15.3x. The average EV/R, from October 7, 2019 to December 24, 2020, is 11.9x.
The average retail price per gram declined week-over-week to $11 from $11.01. The below chart shows Canadian retail dried cannabis flower pricing since we began price coverage.
Canadian Retail Cannabis Stores
As of December 28, 2020, there are 1,384 retail cannabis stores, a week-over-week increase of 11 stores across Canada, including 10 in Ontario and one in Quebec. We continue to expect a significant increase in Ontario’s store count due to the recent mandate of the Alcohol and Gaming Commission of Ontario (AGCO) to approve more Retail Store Authorizations (RSA).