Weekly Cannabis Commentary
Author: Sid Rajeev, Iftekhar Mahmud
Cannabis Industry Performance
Today, Florida-based Trulieve Cannabis (OTC: TCNNF) announced an agreement to acquire Arizona-based Harvest Health & Recreation (OTCQX: HRVSF) in an all-share deal valued at US$2.1B, the largest U.S. cannabis transaction to date. The implied EV/R acquisition multiple is 9x vs the sector average of 12x. The combined entity has operations in 11 states in the U.S., with 22 growing and processing facilities, and 126 cannabis stores.
In Canada, cannabis industry consolidation continues. On May 5, 2021, Sundial Growers (NASDAQ: SNDL) announced its plans to acquire Inner Spirit Holdings (CSE: ISH). The implied EV/R acquisition multiple of this C$131M deal is 5x vs the sector average of 16x. The acquisition price is 72% of our last fair value estimate (March 30, 2021).
Recent data published by Statistics Canada showed that cannabis extracts sales grew 242%, from Q1-2020 to Q4-2020, to reach $124M. Even with this sizeable growth, extracts and concentrates only accounted for 15% of Q4 total cannabis sales – indicating significant room for further growth. We note that mature markets such as Colorado have over 30% from extracts and concentrates.
As of May 7, 2021, the Canadian big four LPs were trading at a 94% premium (down from 106% in previous week) over their U.S. peers. The valuation gap between the two sectors decreased WoW as the Canadian sector underperformed, per our anticipation. Two factors contributed to this – declining Canadian cannabis sales data, and increased short position in Canadian cannabis stocks (discussed in the previous AIW).
The following chart shows the average EV/R of the companies we track in both sectors:
The average retail price per gram decreased week-over-week, from $11.29 to $11.28. The chart below shows the Canadian retail dried cannabis flower pricing trend:
Canadian Retail Cannabis Stores
As of May 10, 2021, there are 1,982 retail cannabis stores, a week-over-week increase of 33 stores across Canada, with 23 in Ontario, and five each in Alberta and B.C.