Raymond James: Fundamentals Improving Across Canadian Cannabis Sector

Article by Justin Young, Deep Dive

Briefing Cannabis Raymond James: Fundamentals Improving Across Canadian Cannabis Sector October 19, 2020 10:53 AM Justin Young

Last week Raymond James said in a note to investors, “Canadian Cannabis Stock Selloff Overdone | Fundamentals Driving Divergence Between Strong & Weak Operators.” Rahul Sarugaser, Raymond James’ analyst, calls the bottom in the Canadian Cannabis sector as he explains, “fundamentals are improving across the Canadian cannabis sector.”

The analyst believes that there will be a “rapid downward spiral of these poor operators, causing them to finally relinquish their lingering grip on market share, leaving a significant vacuum for the quality operators to fill.” This is expected to then allow quality operators to come in and gain market share.

In the note, he summarizes the well-know issues that “hobbled the Canadian cannabis sector from the earliest days of its history as a legal adult-use market.” He says the number one issue was the undersupply, high product return rate, and a limited variety of products as flowers and oil were the only products allowed at the start of legalization. The second issue was how slow the retail rollout was, specifically in Ontario, representing 40% of Canada’s population. Ontario used a “sluggish, flawed lottery system that further delayed the deployment of brick and mortar retail.”

The third reason is that there was and still is a substantial illicit market with a ~75% market share in Ontario in the first quarter of 2020, with the fourth issue being “far too many cannabis licensed producers.”

Sarugaser says that “even with a steady conversion of Canada’s illicit market, there are currently too many operators supplying the sector. 490 licenses have been issued to supply a market of 35 million people.” Sarugaser also adds, “We anticipate the implosion of several large, inefficient, tenuously financed Canadian operators during the next handful of quarters.”

Read the full article here.

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