Canadian Cannabis Sector Sentiment Could Improve Soon

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Friends,

Two years ago, just ahead of legalization in Canada, Deloitte projected 2019 sales would exceed C$4 billion. In fact, they came in less than C$1.2 billion, far short of expectations. In May, sales of C$186 million, which would be an annual rate of about C$2.2 billion, show that the market still has not lived up to its potential. The New Cannabis Ventures Canadian Cannabis LP Index illustrates well how dearly investors paid for being overly optimistic about the roll out of legal cannabis:

We have discussed some of the main reasons for the short-fall, including the small number of retail stores as well as the lack of derivative products. The good news is that both of these challenges are being addressed. Of the four large provinces, only Alberta has experienced a robust number of store openings, but British Columbia and Ontario, the largest province, are seeing rapid improvement. BC now has issued 260 licenses, with 45 additional approved applications and 198 complete applications in process as of July 20th. 215 stores are currently open, including 19 that are operated by the province. In Ontario, 117 licenses have been issued and another 503 are in progress. The Alcohol Gaming Commission of Ontario is currently receiving “hundreds of new applications” each month and is issuing approximately 20 licenses per month.

Derivative products launched earlier this year, and they seem to be showing some traction. Cannabis data analytics platform Hifyre IQ indicates a steady progression in vapes, the most popular derivative product, which it estimates accounted for about 14% of the overall market in May. Edibles were about 4%, while concentrates and beverages were a bit less.It will likely take some time for the market to develop, but derivative products typically account for about 50% of sales in mature American markets.

We think that many investors have become overly negative about the outlook for the Canadian market and may be missing some of the structural improvements as well as capacity reductions across the sector. A benefit from the declining flower pricing is that it appears to be helping to draw illicit market customers into legal stores, many of whom we understand are purchasing some of the new derivative products. On the Organigram conference call to discuss Q3 financials, CEO Greg Engel pointed to strong interest in 510 cartridges and suggested as well that PAX is committing more substantial marketing support for its products now that there is more supply available.

This week, Aphria, which has been a leader in retail sales, will be reporting, giving investors an opportunity to learn more about the current state of the market. According to Sentieo, analysts expect Aphria’s Q4 revenue to be similar to Q3, with slightly improved profitability. In Q3, the company reported sales of C$144 million, and the consensus for Q4 is C$148 million. Aphria sales are primarily non-cannabis pharmaceutical distribution revenue that was about C$89 million in Q3 and likely to remain the same. The C$55.6 million cannabis revenue consisted of C$8.7 million from medical, C$44.7 million for adult use and C$11 million for wholesale. The most important component to monitor is the adult-use revenue. According to Hifyre IQ’s data, Aphria products saw very strong growth in the three months ending in May compared to February, which could translate to strong adult-use revenue, depending on reordering rates. We shared a more extensive review ahead of the earnings report at 420 Investor last week.

Earlier this year, an earnings report out of Organigram sparked a very strong rally across the sector. In May, the reaction to the Q3 Aurora Cannabis financials also excited investors. It’s always a challenge to predict how others will react, but we like that the action in the market is quite sedate heading into Aphria’s report. Even if it doesn’t prove to be the catalyst we think it may be for the sector, we are optimistic that the market conditions are quietly improving.


Setting the standard for quality and innovation in cannabis has always been at the forefront for Canadian LP Indiva. The company produces premium pre-rolls, flower, capsules, and edible products and provides production and manufacturing services. Indiva has seen strong growth in revenue from its chocolates as the company works on reporting improved financials over the balance of the year. Described as the #1 cannabis edibles leader in terms of market share with its Bhang® products and with distribution in place across eight provinces, the company has been able to procure good access to capital despite recent turbulent events.

Get up to speed by visiting the Indiva Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.


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Sincerely,

Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online communities 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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