Retail Cannabis Sales up 6% in June

Bottom Line: The rollout of retail stores in Ontario is making a huge difference to demand growth, contributing 60% of the growth countrywide since March. 6% monthly growth would mean retail cannabis sales will hit a $1.5 billion annual rate by December of this year, or 25% market share when the black market is included.

Source: StatsCan

 

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Tilray Exports to Europe May Be Just the Beginning

Bottom Line: Investors should watch Tilray’s exports from Portugal to Germany closely. If Germany looks like it is favouring European imports over those from Canada, excess supply in Canada could have a tougher time finding a home. LPs are telling investors excess supply in Canada will be absorbed by European demand, but Tilray’s success could undermine this narrative.

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Canopy Growth Receives License for In-house Extraction

Bottom Line: We expect large producers will bring most of their extraction needs in house and could even offer extraction services to others if they have idle capacity from time to time. Canopy’s facilities can produce 10x as much cannabis as Canada currently consumes. Third-party extraction companies will need to provide value-added extraction expertise to stand out and maintain margins which are currently at juicy levels.

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CBD Successfully Exported from Colombia to Switzerland

Bottom Line: This is the first commercial export permit for CBD granted by the Colombia government. We need to see if this is the first of increasing volumes exported to developed markets or just a one-off. Colombia will likely emerge as a low-cost supplier of cannabis to the world and increasing exports of CBD or THC could signal competition will be heating up in Europe sooner than later. Marijuana - Colombia - MJ

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Cannabis Employment More than Triples in Canada

Bottom Line: Cannabis remains the fastest-growing employment category in Canada, but sales of C$1 billion a year are still less than 0.1% of GDP. The entire market (black and legal) is about 0.5% of GDP. We think cannabis will continue to be a big growth engine in Canada even with the growing pains from a slow rollout of legalized supply.

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Colorado Increasing Testing Requirements

Bottom Line: Convincing consumers that legal cannabis is far safer than black market alternatives will be key to killing the illegal market. We think states and provinces should do more to publicize contamination found in black market cannabis and the sanctioning of legal producers who release contaminated supplies into the market.

marijuana - mj medical 6

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Aurora Partner Tikun Olam Up for Sale

Bottom Line: We wonder if Aurora will be one of the bidders for Israeli-based grower Tikun Olam due to the existing royalty relationship between the two companies. This looks like a distressed sale so won’t give us much information about the market price for cannabis assets in Israel. $100 million would be a drop in the bucket for Aurora.

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Weekly Marijuana Stock Performance

Macroeconomic fears of a worsening trade war and continued negative sentiment dragged the cannabis market down another 6%. The global cannabis index is now flat for the year, while the U.S. producers are down 18%. With sales up more than 300% for many multi-state operators and Canadian LPs, it’s clear multiples (sentiment) are coming down from the lofty levels of 2017-2018.

U.S. producers underperformed Canadian companies once again by 2%. U.S. stocks fell 7.5% while Canadian stocks were down 5.5%. The Canadian large-cap index was down almost 10% this week driven by selling follow through after the disappointing Canopy Growth earnings last week.

If U.S. MSOs do not start outperforming their Canadian peers after a terrible earnings season in Canada, nothing short of regulatory change will drive the U.S. stocks to new heights. The STATES act is the likely catalyst for U.S. Cannabis stocks.

The overall marijuana index underperformed the S&P and TSX by 4.6 and 5.3% and is underperforming by 12% YTD.

New Cannabis Ventures

Market Outlook

We still think a stabilization in the global economy and the coming legalization of edibles in Canada could buoy the sector leading into first sales in December.

With the sector down 38% since May and underperforming the broader market by 38%, we think there is a good chance the sector rebounds into the end of the year as long as global economic data does not take a turn for the worse.

Canadian LPs are still stuck in a legal market growing slower than investors expected, making it hard to show the revenue growth embedded in their trading multiples. LPs are showing slow growth in 2019 and even with the 2020 rollout of edibles, vapes, and topicals growth is unlikely to exceed 150% in 2020. U.S. operators in comparison are growing revenue 150%-300% in 2019 and at similar rates or better in 2020.

Longer-term, with the Canadian market legalized, we expect retail and wholesale price compression or unsold inventory from a legal oversupply by the end of 2019. Falling cannabis prices or an inability to sell all of what is grown will pressure producer stocks in 2020. After a shakeout, the remaining stocks will be better positioned as long-term buying opportunities.

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