Weekly Cannabis Commentary

Author: Sid Rajeev, Iftekhar Mahmud

Cannabis Industry Performance

Cannabis Industry Performance Dec. 24, 2020

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 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.

Average EV/R (October 2019 – December 2020)

Source: S&P Capital IQ, FRC

Source: S&P Capital IQ, FRC

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.

Canadian Retail Cannabis Pricing

Source: Online Provincial Cannabis Stores, FRC

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 Dried Cannabis Flower Pricing

Source: Online Provincial Cannabis Stores, FRC

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).

Nationwide Store Count Dec. 28, 2020

Source: Provincial Websites, FRC

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