Week 11 of 2020 was dominated by the global market meltdown as a result of the Coronoavirus. Pot stocks, which were already heavily oversold, also took a beating.
Creso Pharma (ASX:CPH), the beleaguered Australian medicinal cannabis company, suffered another setback when it announced to the market that it had received a letter of termination in respect of a proposed Israeli joint venture between Creso's wholly-owned subsidiary – Creso Pharma Switzerland – and Cohen Propagation Nurseries. The initial JV, entered into in 2018, would have created an entity that would cultivate cannabis for medicinal purposes in Israel.
This is another example of the company taking a backward step after it also terminated its deal with PharmaCielo wherein the latter was supposed to acquire CPH for (at the time of the deal) AUD$122 million. The company also recently undertook another capital raise, primarily to pay back the bridging loan from PharamCielo (which was part of the aforementioned agreement) and for working capital purposes. We remain firmly on the sidelines and would not be investing in CPH at this time.
THC Global (ASX:THC) announced its preliminary financial report for FY2019, and the results were a mixed bag. Although revenue increased by 80% year on year, primarily due to a broadening of their product offering via their Canadian ancillary business – Crystal Mountain. However, gross margin decreased by 50 basis points to end up at 24% which ultimately flowed through to the bottom line where the company reported Net Profit After Tax (NPAT) of AUD$-11.6m which was an increase (more burn) of 36% over the previous years NPAT of only AUD$-8.6 million.
The outlook for THC is very bright, however, as their Southport Extraction Facility (the largest in the Southern Hemisphere) is now coming online and has the capacity to service the entire Australian medicinal cannabis community (estimated to be around 250,000 patients by 2028). At current prices (AUD$0.31 at the time of writing), we believe this offers investors significant upside if THC can really start to leverage the Southport production capacity.
The big news was Canopy Growth's (NYSE:CGC) decision to shut its British Columbia greenhouses (Aldergrove and Delta) which together represent about 3 million square foot of licensed production capacity. In a complete reversal of the strategy that companies followed a year or two ago – ramp up capacity and try and produce more cannabis than anyone else – has quickly changed to a focus on cost-cutting and defining a path to profitability. This was yet another signal that there is simply far too much production capacity in Canada. This will do little, however, to appease the 500-odd workers that will lose their jobs as a result of these closures.
Tilray (NASDAQ:TLRY) this week reported their Q4 2019 results which could only be described as underwhelming – at best. Revenue of CAD$28.3m was 5% down on the previous quarter (although to be fair, most of the LP's have reported negative revenue growth). Much of this weakness was due to a decline in Tilrays's wholesale cannabis revenue, as wholesale pricing is put under immense pressure as oversupply and a surplus of capacity dominate the Canadian landscape.
In addition to declining revenues, Tilray's gross margin also declined to 29% which, again, flowed through to the bottom line resulting in adjusted EBITDA decreasing even further to CAD$-35.3m which was a decrease of almost 50% on the previous quarter. Simply shocking. We have been for some time now, and continue to be, firmly on the sidelines on Tilray.
One stock to place on your morning watch list would be Canadian recreational retailer – High Tide (CSE:HITI). The company announced its Q4 2019 earnings, with revenue increasing 35% over the previous quarter to CAD$11.4m. Although this number was below analysts' expectations, High Tide has come through a period of rapid store expansion, and with this behind them, can now focus on improving operating leverage and profitability. In this regard, the company gave guidance of its first profitable quarter sometime in the 2020 Financial Year.
Curaleaf (CSE:CURA) expanded its edibles range via its acquisition of Colorado-based BlueKudu. BlueKudu is an award-winning producer of a range of premium cannabis gummies and chocolates. The acquisition is significant as it gives Curaleaf access to BlueKudo's 8,000 square-foot kitchens and a range of products that are currently distributed in over 200 retail locations across Colorado. In addition, Curaleaf now has the opportunity to distribute its range of Select products throughout Colorado (via its acquisition of Cura Select earlier this year).
Illinois cannabis sales continue to shine since the legalisation of recreational cannabis on January 1st of this year. Sales for February amounted to just over USD$35m, and although this was slightly lower than the USD$39m sold in January, stock shortages and limited wholesale supply were the primary factors. So far in 2020, the State has generated over $75m in sales putting it on an annualised run rate of over USD$450m in its first year. This would be one of the fastest revenue run rates, behind only California.
In the past couple of weeks, we have written much on the potential impact that COVID-19 (the Coronavirus) could have on the cannabis industry. One of the biggest risk factors to the industry would be regarding the production of vaping equipment (in particular cartridges) whose supply chain have been severely impacted by the shut down of most of the Chinese factories. This is the second macro-factor to severely impact the cannabis vaping sector after the vaping crisis crippled the US industry in 2019. We expect this to ancillary companies like KushCo Holdings (OTC:KSHB) and other companies heavily invested and dependent on vaping products.
And finally, to the UK, where the Home Office and the Department of Health and Social Care announced the easing of restrictions related to the comporting of medicinal cannabis. Almost all of the UK medicinal cannabis patient base is serviced through imported cannabis. However patient access to these drugs has been severely impacted by import restrictions that delayed international shipments by up to two months.
The new changes mean that licensed wholesalers can now import greater quantities, and – importantly – be able to hold larger amounts of inventories which should significantly reduce the waiting time many patients are experiencing. Australian based Althea Group is set to benefit greatly from the relaxing if the rules and regulations.
The UK cannabis market could be on the verge of a multi-billion-pound boom
While the majority of cannabis sold in the UK still comes from the black market, things are rapidly beginning to change.
In fact, a 2016 UN report found that the UK accounted for approximately 45% of global cannabis production, while also being responsible for 70% of the worldwide export market.
However, the UK industry is still in its infancy, which has left investors starved for British pot stocks to add to their portfolio.
And with Prohibition Partners predicting the industry could reach $3 billion in size by 2024, this is one investment opportunity you don't want to miss.
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