Marijuana stocks and Canadian cannabis stocks in particular are at abysmal valuations. A recent Seed Investor article noted that the (Canadian) Marijuana Index has reached a two-year low.
This comes despite the fact that the cannabis sector has progressed a long way, both in regulatory evolution and industry growth. Statistic Canada’s most recent numbers on cannabis retail sales (June 2019) show three consecutive months of double-digit sales growth.
This surge coincides exactly with Ontario (Canada’s largest province) finally opening up some cannabis retail stores. Meanwhile, Alberta, Canada’s cannabis leader now has more than 270 cannabis retail locations throughout the province.
Just ahead comes Phase 2 of cannabis legalization in Canada. This means not only (higher margin) value-added cannabis products like concentrates and edibles. It also means an estimated 3 million new cannabis consumers in Canada, increasing the consumer base by roughly 50%.
In short, Canada’s cannabis industry has turned the corner. Canadian cannabis retail is already booming. And there is every reason to expect continued acceleration as we move into 2020.
In addition to the new Phase 2 market, Ontario has promised to more-than-triple retail storefronts through awarding an additional 50 cannabis retail licenses. Several provinces, notably British Columbia, are also just starting to reach a critical mass in retail outlets.
This will strongly (and positively) impact revenues for the entire Canadian cannabis industry. However, investors looking for the best bargains may want to start with cannabis retail.
Several of Canada’s larger, vertically-integrated LP’s have retail exposure. But three companies currently stand out as pure plays in Canadian cannabis retail. National Access Cannabis (CAN:META), Choom Holdings (CAN:CHOO / US:CHOOF), and Fire & Flower Holdings (CAN:FAF / US:FFLWF) dominate the retail landscape in Canada, in terms of operating storefronts and near-term expansion plans.
Here is where astute investors will want to look more closely at the numbers. In this case we have two sets of numbers to compare.
There are the current valuations of these major Canadian cannabis retailers, their share prices. Then there is the deemed value of a Canadian cannabis retail storefront – calculated through a major recent acquisition by Canadian cannabis giant, Tilray Inc (US:TLRY).
On August 29, 2019; Tilray acquired 420 Investments Limited (FOUR20), in a deal that largely flew under the radar of cannabis investors. FOUR20 operates six licensed cannabis stores, all in Alberta.
It also has 16 additional “high-traffic store locations”. Call those: cannabis store opportunities.
The upfront acquisition price is CAD$70 million. However, that price could rise to $110 million (an additional $40 million) through achievement of certain milestones, specifically the monetization of those 16 additional cannabis opportunities.
Now let’s crunch the numbers.
CAD$70 million for six operating stores. That’s $11.667 million per cannabis store.
Investors with a more forward-looking perspective may be eqully interested in a second metric: CAD$40 million for the 16 store opportunities. That’s a current discounted price of $2.5 million per cannabis store opportunity.
Now let’s take these numbers and see how they would potentially impact valuations for Canada’s cannabis retail leaders.
It’s important to note that what is being calculated here is not some future projection of the value of these companies. Rather, it’s an estimate of their current value, based upon the recent acquisition in Canadian cannabis retail by an industry leader (Tilray).
More pertinently, it’s an estimate of their current value at a time when the entire sector is extremely depressed. In other words, the numbers above reflect what these companies could (should?) be worth before the Next Rally commences in the Canadian cannabis industry.
We know these are reasonable estimates because one of the numbers (for Fire & Flower) is not far above the current share price of that company. Suggesting any Canadian cannabis company is presently fairly priced is a dubious proposition – given the extremely depressed share prices across the sector.
One reason why Fire & Flower is closer to being fairly valued than its peers is that this company recently benefited from the addition of a strong strategic partner.
On July 24, 2019; grocery and convenience store giant Alimentation Couche-Tard (CAN:ATD.A US:ANCTF) announced a CAD$25 million strategic investment in Fire & Flower. More importantly, Couche-Tard pledged up to CAD$380 million of “growth capital” for its cannabis initiative.
That’s how the valuations look for these cannabis retail leaders when we view them only in terms of stores already open. But each of these companies is aggressively expanding their retail capacity.
Let’s take a second look at valuations, but also plug the “store opportunity” numbers into the calculation.
This is a calculation that shouts “value” to forward-looking investors. Taking Tilray’s discounted price for these cannabis store opportunities, we see that all three retail leaders look even cheaper at their current share price.
Whether viewing current cannabis storefronts alone or also near-term store opportunities, there is a clear opportunity for investors with any of these three companies.
Most cannabis companies can be expected to benefit strongly when the sector emerges from its deep trough and individual companies correct to more rational numbers. However, investors looking for the most upside potential today may want to start with these cannabis retail leaders.
DISCLOSURE: Choom Holdings is a client of The Seed Investor.
Published at Wed, 11 Sep 2019 10:00:01 +0000