According to the report released on May 28, 2018, both companies stand to benefit from a first mover advantage in initial recreational markets as many cannabis companies in Canada do not have the inventory or production capacity to meaningfully participate in the market while both Aphria and Canopy do.
In the long term, BMO believes that cannabis cultivation will become a commoditized activity and that oversupply will become an issue. Although a majority of cannabis brands hope to counter this through the development of brands or through the expectation that they will become a low-cost producer.
The Aphria Opinion
BMO expects that most cannabis firms will not be able to generate sustainable margins at scale, but they do believe that Aphria will be one of the few that can. The report points to the extensive commercial greenhouse cultivation experience held by the company’s management team and to the inherent infrastructure and greenhouse culture in Leamington, Ontario, where the company is based.
Aphria’s target price is $17 and is based on a projected enterprise value that is 17x BMO’s Base Case Fiscal 2020 EBITDA estimate; which in turn was based on the assumption that Aphria’s facility expansions would only be at 65% of its full production capacity by 2020.
The Canopy Growth Opinion
Canopy, on the other hand, is well positioned to become a global brand leader. In addition to the company’s first-mover advantage, the company also has a head start in the international market; establishing cultivation centers in hub regions like Denmark for the future export of medical cannabis to Germany and possibly the rest of Europe.
Canopy’s target price is $45 and is based on a projected enterprise value that is 20x BMO’s Base Case Fiscal 2020 EBITDA estimate. Like Aphria, this figure is based on the assumption that the company would only be at 65% of its full production capacity by 2020, even though both companies expect to reach 100% by that date.
MedMen Goes Public
In related news, MedMen Enterprises announced today that its stock would begin trading today on the Canadian Securities Exchange at 11 a.m. eastern time under the ticker symbol “MMEN”. The company will raise roughly C$143 million or $110 million from the listing, giving MedMen an enterprise valuation of C$2.14 billion or $1.65 billion.