RBC Pegs Legal Cannabis Sales at 12% of Market as Illicit Prices Seen Dropping

Article by Marcy Nicholson, Globe and Mail

MERGERS AND ACQUISITIONS RBC pegs legal pot sales at 12% of market as illicit prices seen dropping MARCY NICHOLSONCANNABIS PROFESSIONAL REPORTER

Only 12 per cent of recreational pot purchased in Canada came from licensed retail stores in the second quarter of 2019, RBC Capital Markets said, as retail prices remain far above those on the black market.
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The lack of licensed retail stores, strong illicit market, expectations for a supply surplus as inventories build, and vaping health concerns will make near- to medium-term growth challenging for licensed producers (LPs), said RBC Dominion Securities Inc. analyst Douglas Miehm and senior association Savneet Uppal in a report on Wednesday. The bank subsequently lowered prices targets for seven major producers on expectations for impeded growth.
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These outlooks underscore growth prospects for Canadian LPs, who are struggling to secure additional capital as they strive to increase production capacity.
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“We estimate that LPs have shipped nearly twice as much product to provincial wholesalers as the latter have sold to end users. Thus, we believe the single-largest bottleneck limiting legal cannabis consumption is the lack of storefronts in Ontario and Quebec,” the report said.
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“While incremental store openings in these two provinces should drive a step-function increase in sales, we believe the pace and absolute number of locations will remain too low over 2020 to drive meaningful conversion of the illicit market.
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Alberta granted its 301st retail cannabis licence this week, as it by far has more legal pot shops than any other province. Its population, however, is roughly a third of in Ontario, Canada’s biggest consumer market.
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After the legal industry started last year with a supply deficit, RBC now sees oversupply on the horizon, following a considerable build in inventories and increased harvest sizes.
“We believe there is a growing amount of cannabis that consumers do not want, setting the stage for oversupply,” RBC said.
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“Health Canada data suggests that LPs and distributors/retailers have several months of inventory on hand, which without a meaningful uptick in demand could lead to product returns, pricing pressure at the wholesale level, and limited follow-on provincial orders for all industry participants.”
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Earlier this week, BMO Capital Markets said the amount of cannabis that LPs sold to provincial wholesalers dropped by half in July, raising concerns products will be returned and inventory values will fall, and causing it to lower its price targets for growers.
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On Wednesday, The Green Organic Dutchman Holdings Ltd. said it was “reviewing financing alternatives” needed to complete construction at two of its facilities, due to “changing market conditions” that have made financing “unavailable on acceptable terms within the timeframes required,” the company said.
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Additionally, the “vaping crisis” of deaths and illnesses largely from illicit vaporizers in the United States, will likely reduce sales when new vape products are soon permitted to be sold in stores as consumers are likely to take a cautious approach, and regulators could even delay the launch set for December.
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“Interestingly, the price per gram sold appears to have increased since the onset of legalization. This is consistent with price hikes seen on some of the best-selling products in different provinces, according to our Elements data,” the report said.
Meanwhile, prices on Canada’s illicit market declined after recreational pot was legalized in October 2018, with the discount to licensed retail prices widening to around $4.72 per gram from $3.31.
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“With illicit users flagging price as a growing deterrent towards migration into the legal market – and that effect now looking more pronounced – we believe legal demand is likely to remain limited,” RBC said.

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