May 13, 2022
Cannabis Canada Weekly: Ontario Cannabis Store leak; Analyzing Cronos' latest results
Aurora Cannabis posts $1B quarterly loss
TOP NEWS OF THE WEEK
Police investigating Ontario Cannabis Store sales data leak
Ontario authorities are investigating a data leak from the Ontario Cannabis Store that detailed how the province's brick-and-mortar retail stores are faring. A letter from the OCS to retailers obtained by BNN Bloomberg said the data was "misappropriated, disclosed, and distributed unlawfully". The leaked data, some of which was seen by BNN Bloomberg, includes the revenue, number of kilograms of cannabis sold, total units sold, and sell-through rates for individual stores in Ontario. That unlawful disclosure could provide a competitive advantage for some retailers and damage confidence in the province's management of the cannabis sector during an election.
Village Farms, Nova Cannabis, and Aurora highlight earnings week for Canadian firms
Village Farms International reported disappointing first quarter results, with profit missing expectations amid weakness in its produce business. Village Farms' Pure Sunfarms subsidiary reported a 25 per cent jump in annual sales to $27.6 million and eked out a $1.3 million net profit in the quarter, but the company’s shares still slid 10 per cent over the past week as analysts see inflation headwinds hurting produce sales to big box retailers.
Meanwhile, Nova Cannabis's first quarter results provided further insight into Canada's volatile cannabis retail space with a 171 per cent rise in revenue to $49.8 million. Eight Capital estimates that the average Nova Cannabis-owned store generates about $660,000 in quarterly revenue, nearly double the average sales that a typical pot store in Ontario generates.
Lastly, Aurora Cannabis announced a trifecta of facility closures, including its flagship Aurora Sky plant in Edmonton, while also reporting a $1 billion net loss and a nine per cent sequential sales decline in its fiscal third quarter.
U.S. pot operators’ quarterly results suggest slower sales growth
Several major American cannabis operators reported first quarter results last week that showed sales growth may be slowing. Curaleaf, the United States' largest cannabis chain, and Ascend Wellness both reported quarter-over-quarter sales declines, while TerrAscend was relatively flat and missed analyst expectations. Trulieve stood out from the rest of the pack, demonstrating a four per cent quarterly sales increase to US$318.3 million in the face of declining markets and margin contraction from its main competitors. Several analysts pointed out that Trulieve’s cash position at US$267 million puts it in an advantageous spot to pursue potential M&A deals and enter new markets. Still, the U.S. pot sector's first-quarter performance failed to inspire confidence among investors, with the Horizons US Marijuana Index ETF dropping by 5.2 TK per cent over the past week.
Public safety concerns may help push passage of U.S. SAFE Banking Act
A rise in cannabis-related crime might be the catalyst needed to advance legalization legislation on Capitol Hill, according to a report in Politico. Passing a bill that ensures cannabis companies can legally engage with banks and other financial institutions is gaining momentum amid a rash of robberies and deaths across several U.S. states. Politico notes public safety concerns have been highlighted by national banking lobbyists and other groups as a key reason to pass or include some measures of the SAFE Banking Act into law. Analysts widely believe SAFE has a chance of finally crossing the legislative finish line this year, with some industry leaders like Curaleaf's Boris Jordan stating its passage would allow companies like his to uplist to major exchanges like the Toronto Stock Exchange.
Thailand’s health minister to ship 1M cannabis plants to spur domestic industry
Thailand's rapid about-face on cannabis legalization reached another level as the government plans to ship one million free marijuana plants across the country to help people grow it at home, The Nation reports. Thai Health Minister Anutin Charnvirakul said that the move will help generate as much as 10 billion baht ($374 million) in sales for the country's burgeoning cannabis industry. The newspaper reported the minister said in a Facebook post that "businesses could compete freely in Thailand’s cannabis market" and smaller sellers won't need to register with the country's drug regulators. The country, which legalized medical cannabis in 2018, expects the revenue boom to bolster its economic prospects after taking a hit from the COVID-19 crisis.
ANALYST CALL OF THE WEEK
Breaking down Cronos' Q1 results
Cronos Group has taken a relatively cautious approach to the Canadian market, opting for a more asset-light business model that emphasizes third-parties to help fulfill the demand for some of its products. That strategy appears to be paying off after first quarter results showed sales doubled over the past year while slicing its adjusted EBITDA loss in half to US$18.9 million.
“It appears the company is now making some tangible advancements following years of investing and product development,” said BMO Capital Markets Analyst Tamy Chen in a note to clients. While Cronos’ sales in the Canadian cannabis market fell 24 per cent from the prior quarter, it got a boost from nearly tripling its revenue in the Israeli market to US$9.1 million. Chen said she was surprised by Cronos’ success in Israel, but noted that the company has invested in “boots on the ground” and has developed its own brands that are sold in the country’s pharmacies. She does question whether Cronos is making the right move in supporting its brands in the Canadian market after slashing its sales and marketing costs by half.
Stifel’s Andrew Carter – who maintains a hold recommendation and a US$4 target price on Cronos shares – said the company’s results stand out in a tough environment but remains cautious amidst the bearish investor sentiment on the cannabis sector. He highlighted the swing in Cronos’ gross margins to 28 per cent and said the company is now “showcasing success” with some of its products in the Canadian recreational market and nearly US$1 billion in cash on its balance sheet.
Meanwhile, Cowen & Co. Analyst Vivien Azer – who has a market perform rating and a US$3.47 price target – said in a report that Cronos’ gross margins could continue improving after shutting down its Peace Naturals production facility and also bolster its bottom line by acquiring more of the 50 per cent stake in its GrowCo facility. However, profitability will continue to be elusive unless the company continues to cut costs, she said.
Cronos CEO Mike Gorenstein appeared on BNN Bloomberg to discuss the results, highlighting the company's brand strength and future. Analysts now have an average 12-month target price of $6.16 on Cronos shares with four buys, eight holds and one sell, according to Bloomberg data.
CANNABIS SPOT PRICE
$5.20 per gram
-- This week's price is up 0.4 per cent from the prior week, according to the Cannabis Benchmark’s Canada Cannabis Spot Index. This equates to US$1,815 per pound at current exchange rates.
– The amount of impairments and goodwill write-downs that Aurora Cannabis announced on Thursday when reporting its fiscal third quarter results.