Stifel Archives - Green Market Report

Debra BorchardtDebra BorchardtMarch 8, 2021
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Despite a solid outlook for the Canadian cannabis market and producers who have raised almost $1 billion over the past few months, Stifel analysts delivered a sobering report on the industry. 

We believe it will be increasingly difficult to profitably capture growth in the Canadian market with “strengthened balance sheets” across the sector likely facilitating continued irrational deployment of capital with limited prospects of a shakeout driving the market towards rationality. 

Good News For Canada

First, the good prognostications for the Canadian cannabis market. Stifel worked with Headset data to create its latest report. Headset covers roughly 65% of the Canadian sales market and is a good indicator of the overall health of the industry. Sales in January 2021 were up 106% over 2020, but down 1% from December 2020. This is leading the analysts to forecast that the market will reach over C$4 billion in 2021 sales. The analysts also estimate sales in the adult-use market will double over the next two years reaching C$6 billion before slowing to a high-teens rate of growth.

The analysts also suggested that the second wave of new products hitting the markets will be a boost to the industry. Vapes, edibles, and beverages are new to the Canadian consumer. However, packaging restrictions and THC caps are issues that could prove challenging to producers. Flower, as usual, is the big category leader, unfortunately for producers prices for flower continue to fall. “The deep discount segment represented 46% of dried flower category sales in the three months ending in January, growing 28% over the last three months.”

Lead analyst W. Andrew Carter wrote, “Despite our robust outlook, we outline an increasingly competitive environment and uneven performance by Canadian producers. Latest Headset trends suggest robust growth for HEXO (HEXO.CN; C$8.85; Hold) providing support for our recently revised estimates ahead of F2Q21 on March 18th, softer trends from Aphria (APHA.CN; C$23.01; Hold) suggesting risk to our F3Q21 estimates, January market share gains for Canopy Growth (NASDAQ: CGC); C$42.06; Sell) driven by discount brand Tweed. but also outperformance in Ontario with the company likely placing significant focus on this key customer, and continued declines from Aurora Cannabis (ACB.CN; C$13.25; Sell).”

Canadian Capital Raising Is On Fire

Remember the bear market of 2019? Tight capital? Cannabis companies struggling to find anyone willing to invest? Those days are over. Stifel wrote, “Between ATM issuances, warrant exchanges, and equity offerings, Canadian producers have raised roughly $1 billion in the past few months. Offerings completed by Canadian producers have been on relatively unattractive terms burdened with significant warrant coverage. Aurora Cannabis (ACB.CN; C$13.25; Sell) has completed two equity offerings since early November raising over $300 million issuing 36 million shares (23% dilution) with attached warrants suggesting another potential 9% dilution.”

The analysts went on to say, “The shares of Sundial Growers (SNDL; $1.30; NC) were caught up in the “GameStop Saga” to which the company furthered its long-term prospects by announcing a $100 million unit deal including close-to-the-money five-year warrants, followed by a $74.5 million unit including close-to-the money warrants, and then raising another $89 million exchanging the issued warrants for newly issued close-to-the money five years warrants. And the company utilized roughly $225 million of its outstanding ATM amid the volatility suggesting nearly $500 million in capital raised on market volatility.” Within the Stifel report, it is worth noting that Sundial was listed as having a sales decline of 17% through January 2021 for three months trailing in four provinces. That number improved (?) to a decline of 12.5% by the end of February 2021 for three months trailing. 

Fortunes have changed dramatically. The analysts noted that companies struggling with meeting debt covenants just months ago now have hundreds of millions of dollars “with limited organizational investment remaining to compete in the Canadian market, and we have been surprised some institutions have favored renegotiating debt over pursuing value creation through recourse options.” 

Any category shakeout will have to be driven by provinces and consumers through differentiated capabilities and brands, and Canadian market restrictions makes building brands extremely difficult at this stage of the market’s development.

Cheap Weed Wins

The Stifel report also highlighted that the average price-per-gram of dried flower in Headset measured channels had fallen to C$6.76 in January from C$9.27 in March of 2020. “Against increased competition at the producer level, we find the total inventory at the provincial/wholesale level has gone from 76 days in March 2020 to 56 days in October 2020, though that increased to 68 days in November.” Producers are seeing their profits decline as discounted cannabis brands are commanding a large size of the shipments. That combined with higher excise taxes on the percentage of gross sales has combined to cut into profits.

The analysts noted that Canopy Growth has been aggressively cutting prices in order to protect market share. “We believe Canopy’s outlook for 9% pricing compression over the next year is optimistic within the context of the current market.”


Debra BorchardtDebra BorchardtDecember 17, 2020
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Stifel analyst Andrew Carter has downgraded Aphria (NASDAQ: APHA) from Buy to Hold and upgraded Tilray (NASDAQ: TLRY) from Sell to Hold following the announcement of the company’s merger. In the merger agreement, Aphria shareholders will receive 0.8381 shares of Tilray’s for each Aphria stock they own. Aphria will own about 62% of the combined company, however, the merged company will supposedly be known under the Tilray name and would trade with the TLRY stock ticker.

He said that the merger with Tilray offers compelling long-term potential but limited near-term upside. He raised the target price from C$8.25 to C$9.90 for Aphria based on the company’s 62% of the new combined company.

“We are taking a positive approach to this merger given the long-term potential. But pursuing this merger attracts scrutiny,” he wrote in his note. “Aphria has successfully achieved a leadership position in the Canadian adult-use market organically, and we question the opportunity cost of capital/management bandwidth for undertaking this acquisition. We believe the shares are likely to remain in a holding pattern over the near-term as investors gain confidence with the combined platform’s long-term potential. Against the incremental contribution, we are reducing our revenue estimates for the distribution business assuming the 1Q21 run-rate of C$82 million as the appropriate run-rate going forward. With our outlook suggesting discount will be a more fulsome percentage of sales, our estimates consider a higher level of excise taxes pressuring both net sales and EBITDA.”

Tilray’s price target was raised to $9.20 from $5. He wrote, “We believe Tilray offers a difficult case for standalone value creation with Tilray not showcasing, in our view, an enduring right-to-win for new market opportunities particularly in the U.S. with the increasing competitiveness of the Canadian market likely challenging the company’s ability to offer a profitable template for investors. We believe Tilray is contending with underappreciated liabilities and liquidity needs that would otherwise challenge the company’s ability to drive investor enthusiasm. But this merger provides Tilray shareholders participation in a platform offering truly impressive growth potential with the initial announcement suggesting a 23% premium to Tilray’s December 15th closing price.”

Carter believes the combined company will generate $890 million in combined 2021 net revenue with cannabis sales approaching $500 million with the combined portfolio offering mid-teens revenue growth and a combined margin profile comparing well with traditional consumer assets (~20% EBITDA margin).

“While we believe the combined platform will offer investors an impressive growth profile and a well-positioned vehicle for capitalizing on the growth of the global cannabis category, we believe the prevailing valuation fully considers the platform’s potential with the focus now on successfully completing a complex integration,” he said in his research report.

 


William SumnerWilliam SumnerJune 6, 2018
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Will the nationwide legalization of cannabis in the United States lead to falling cannabis prices? According to a recent report published by the financial services company Stifel Financial Corp., the answer is yes. Published on May 30, 2018, the report details various market pressures and predictions regarding how the legal cannabis market will over the next several years.

According to the report, there is a strong possibility for price compression in the cannabis market, particularly dried cannabis, for several reasons. The first reason is that the highly attractive economics of cannabis will lead to an influx of actors hoping to cash in on the industry, which will lead to oversupply; citing Canada as an example.

Set to legalize adult sales of cannabis this summer, Canada is set to face an oversupply in the coming years. Another report, issued by BMO Capital Markets, found that although the Canadian cannabis market only needs about 11 million square feet of grow space to support demand, the top three growers are already on their way to having approximately 8 million square feet themselves.

When you figure in all of the other cannabis cultivators in Canada, it is easy to see how the market could become saturated. Likewise, permissive licensing structures in the United States has led to an abundance of cannabis cultivators. The most significant barrier to entry as a cultivator is capital; and with deep-pocketed investors flooding the market, capital is readily available to those that seek it.

Additionally, lower prices will emerge as a necessity to encourage users to abandon the black market in favor of the legal cannabis market. Daily cannabis users, which are predicted to account for the majority of national cannabis sales, are sensitive to price. According to an analysis by the Canadian Parliamentary Budget Office, only 61% of daily users would be willing to pay a 20% premium for legal cannabis products compared to the illicit market.

For cannabis operators, this means having to make a choice between maximizing profitability or volume. Profit maximization would most likely occur through the creation of value-added cannabis products; such as extracts and edibles. Using Colorado, Washington, and Oregon as a model; the Stifel report predicts that the national market would initially favor volume over profitability.

Once again drawing from Colorado, the report predicts that a national cannabis industry would most likely see cannabis sell for a wholesale price of $2.00 per gram and a retail price for $3.50 per gram for medicinal and $5.50 for recreational. Dried cannabis would be hit the hardest, while value-added cannabis products would retain a slightly higher price. Currently, the Cannabis Wholesale Benchmarks has cannabis priced at $1,247 per pound for the spot index in June. Cannabis calculates 448 grams per pound putting the current price at $2.78 and so its forecasted drop would be roughly 28% from today’s prices.

In the BMO report the wholesale price of cannabis, at least in Canada, is predicted to be much higher. Wholesale prices for dried cannabis are predicted to hover around C$4.00, while oil/gel capsules would go for C$6.00 per gram, and value-added formats would sell for approximately C$15.00 per gram.

With regards to cannabis taxation, the Stifel report favors the Canadian tax model, which includes a 10% ad valorem tax with a C$1.00 minimum and the ability for provinces and localities to impose their own taxes. Using a similar 10% ad valorem tax, along with a 10% tax imposed by the states, and a 5% local tax; it is estimated that the United States could generate up to approximately $12 billion in cannabis taxes annually.



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The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


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