VIDEO: Canaccord Genuity Research Analyst Matt Bottomley on Investing in Canadian Cannabis Companies
Canaccord Genuity Group Inc. (TSE:CF) (OTCMKTS:CCORF) (FRA:C6U) is the largest independent investment firm in Canada. Alternative Pharmaceuticals Equity Research Analyst Matt Bottomley talks to James about predictions for the cannabis market come July 1st, as well as how the new laws will affect the sector.
James West: Matt, thanks for joining me today.
Matt Bottomley: Thank you.
James West: Matt, you cover the cannabis sector for Canaccord?
Matt Bottomley: I do.
James West: Okay, and so tell me about what you see happening in the sector generally after July 1, 2018.
Matt Bottomley: Well, July 1, 2018 is obviously the big date. I think there’s a lot to happen even before then; certainly all the provincial frameworks are getting set up right now. There’s considerations of what the models might look like. But I think in July 1, what we’re expecting to see is a huge influx of recreational demand.
However, we’re very careful in how we make that assessment, because in order for that demand to come through, there has to be infrastructure in place; retail distribution, all of those things, province by province, and the LPs themselves have to have enough capacity online to be able to facilitate not only the existing medical patient demand that continues to grow, but also recreational.
So I do think there’ll be bumps in the road, but I think the government is taking an approach of having more of a flower, low concentrated oils in the first year, moving over to some more of the, you know, products that are recreational-friendly if you want to call it that; things you’d see in a lot of the US states that have been legalized for a while now. That looks like it might not be legalized till July of 2019, which gives them time. So I think it’s going to take a couple of years, maybe even more than a couple of years, for the market to sort of mature into a state where there’s enough supply and demand dynamics that have been normalized and everyone can get all the different products that a normalized industry, particularly in this industry, would demand.
But I think that there will, like I said, be bumps in the road with it, but I think it’s going to be a tremendous opportunity for a lot of the players in the space today.
James West: Sure. Do you see any risk that the July 1, 2018 deadline will come and go without legislation due to the fact that a) the Senate has yet to weigh in on it or approve the Bill C45, or any other risks?
Matt Bottomley: I think it’s certainly a risk. You can’t assign it zero, in terms of its risk. I don’t think that it’s something that I’m particularly worried about, for the fact that more than 60 or 65 percent of Canadians do support marijuana being legalized. It’s something that a lot of money is being invested province by province in terms of all the infrastructure, like I said, that’s needed to roll it out, all the jobs that are going to be associated with it, the LPs that are continuing to hire as they continue to expand. So I don’t think either party has the incentive to throw a wrench in it. I think what the Conservatives, particularly, are going to vocalize is, they want to make sure they do it in the safest way possible, and as we sit here in December going to July, is that enough time?
I think that’s a legitimate question to ask, and a legitimate conversation to have, but I don’t think really anyone’s incentivized to make sure that – incentivized to have that deadline get pushed. So I do fully expect July 1 to be legalized, but I think it could mean different things. July 1 being legalized doesn’t mean all of a sudden the switch is turned on and you can get cannabis everywhere; it might mean that Ontario hits maybe 25 of the 40 stores they’re planning, or maybe they’ll hit more than that, who knows.
But it’s going to turn on, in my view, but absolutely there is some modest risk to it based on this getting to the Senate.
James West: Sure. So the Federal government makes no secret about its sort of plan to license as many LPs as it possibly can on a reasonable basis, in an effort to drive down the cost of cannabis for recreational users to coincide with that timing, and that’s how they want to undermine the black market and drive more people into the legal market. Do you think that there’s a risk to the industry generally because of the vast proliferation of new licensees that’s coming out of Health Canada?
Matt Bottomley: Well, it depends on where you want to assign the risk, because I think we’ve seen now, and I’ve been covering the space for over a year, you do see how long it takes to ramp up a facility within Health Canada’s very stringent standards. You do see bumps in the road; we have had pesticide issues in the space. So letting a license online tomorrow doesn’t necessarily get you any incremental supply for July. So I don’t think some of the late-stagers – that’s not to say there won’t be participants in the industry that are coming online recently that will have a place in the space, I think there’s a lot of interesting stories, but there’s a lot of companies out there that are highly, highly capitalized as you know, and I think those companies have a significant first mover advantage.
You know, the influx of licenses coming online, I think the government wants to try and be fair and let other small players come into the space, but again, you know, it’s going to be the invisible hand at the end of the day that sort of dictates where this thing goes, and I think that there’s a lot of leaders in the space right now that can facilitate quite a bit of the demand up front. Obviously there’s a longer way to go. So I do think that your late-stage applicants today are people that are coming online today, there’s probably a higher risk for them that they will be a large part of this industry, but that’s not to say there won’t be cases where they are.
James West: Canaccord is probably the largest institutional player in the space; probably written more cheques into the space than any other investment bank in Canada. So I would imagine that you’re in a prime position to talk about the idea of valuation. I’m concerned that the number of new licensees are going to have a harder and harder time getting a decent valuation to access public capital should they choose that route, based on the fact that with every new license, the implied valuation of the sector goes down somewhat. From Canaccord’s perspective, what is the value of a newly licensed ACMPR producer who is not yet public?
Matt Bottomley: Yeah, so I can’t put a particular number to it, of course, but I can tell you that I like the way you look at it. The way is similar to the way I look at it: there’s a pie out there that needs to be divided up, and as the government decides they’re going to have retail distribution come online, that takes away a little bit of the pie. The taxes that were disposed a couple of weeks ago, that takes a bit of a piece of the pie.
James West: Sure.
Matt Bottomley: More competition obviously shrinks the pie on a pound for pound basis. So obviously more and more licenses coming in makes it more competitive for everyone else, but I think the amount, like I said before, the amount of capital and the amount of experience and expertise that some of the larger players have in the space, is going to make it very, very hard for the lower end, I don’t know if you want to call it, if that’s the right term exactly, but someone that’s newer to the space that still needs some money to continue their buildout, that maybe isn’t going to be up and running till after recreational comes into play – I think that will be more challenging for those players.
Again, I don’t want to discount anyone. I think that I would assign a higher risk to a company like that, which of course would lead to a lower valuation. So I think as more and more LPs come on to the space, the incremental value of the next LP becomes less and less.
James West: Okay. Well, that’s great, Matt. That’s a great introduction to you and Canaccord’s coverage of the space. We’ll come back to you in a quarter’s time and hopefully have another conversation, see where we’re at. Thanks for joining me today.
Matt Bottomley: Look forward to it.
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