PI Financial Corp Analyst on Canada’s Disappointing Recreational Cannabis Sales

PI Financial Corp Cannabis/Special Situations Analyst Jason Zandberg discusses why he’s bullish on the US cannabis market. Zandberg notes that while Canadian recreational cannabis sales are falling behind original estimates, US numbers continue to exceed expectations. He’s excited about the potential of the Florida market and believes the introduction of smokable products, edibles, and rapid patient growth should accelerate sales numbers in that state. Zandberg notes that cannabis laws are increasingly passed through legislation on a state level and means consumers and investors do not have to wait for election periods for legalization to advance. Zandberg indicates that the international market for cannabis is significant but worries current exports are not enough to satiate global markets. Zandberg suggests the Canadian market is experiencing growing pains but the legalization of edibles should help with disappointing recreational sales numbers. Zandberg notes that if Aurora Cannabis Inc (TSE:ACB) (NYSE:ACB) (FRA:21P) finds are major partner, it will act as a sector catalyst.

Transcript:

James West:   Okay, joining me now via Skype is Jason Zandberg. He is the cannabis analyst at PI Financial Corp. Jason, welcome back. Jason, so I’ve been asking everybody on the analyst front the same question, so I’m going to ask it of you as well: what are you seeing in the cannabis space that most excites you right now?

Jason Zandberg:    You know, we’re still paying a lot of attention to the US space, and –

Ed Milewski:  I can’t hear him.

Jason Zandberg:    Can you not hear me?

James West:   Yeah, I can hear you now fine, sorry.

Jason Zandberg:    Yeah, no, we, you know, we continue to like the US space. You know, we saw some data out of the Canadian rec stats from January that, you know, that showed that cannabis is really falling behind in terms of where we expected the first year of cannabis sales to be, whereas it’s the opposite in a lot of the US states. We’re seeing numbers exceed where we are expecting. So we’re focusing very much on the US multi-state operators, you know, and zeroing in on states that we really like.

James West:   Sure. So what are your favourite states, besides California?

Jason Zandberg:    Florida is actually in a great position right now. Not only are we seeing sales doing really well in that state, but they’re introducing smoke-able cannabis now, which wasn’t allowed until just recently. Edibles should be online here soon, so, and also, we expect to see the patient count grow quite rapidly.

Florida, of all the medical-only states, Florida is number two right now; it passed Arizona in the last six months, and you know, we think it’s one of the faster-growing states from the medical programs.

James West:   Sure. So out of the States right now, Jason, that aren’t legal yet, you know, some pretty big populations in, like, Texas is not legal yet, is it?

Jason Zandberg:    No, no.

James West:   And so what are the next big ones to go legal?

Jason Zandberg:    Yeah, Texas is the big state to fall.

James West:   Okay, so when do you think that’ll happen?

Jason Zandberg:    You know, I would expect in the – you know, it’s hard to gauge, but we’re seeing this trend accelerate, so you know, I would probably say in the next five years. But that being said, now that we’re starting to see the legislative process convert states into, you know, either medical or recreational states, you know, we’re not having to wait every two years for special ballots. So you know, unfortunately New Jersey didn’t have their vote today, but you know, we do see that legislation process could rapidly expand the number of legal states both on the medical and the recreational side.

But in terms of Texas, I would say two to five years.

James West:   Wow, okay, cool. What do you make of – I’ve talked to every analyst about this that I’ve spoken to today, too, so I’m trying to stay thematic in getting a nice cross-section of answers, which so far they’re more or less the same. But we saw Peru go legal two weeks ago. Peru has, at this point, no operating companies, no licenses, 32 million people. How much of an opportunity is inherent in international sort of scene as represented by recently licensed Peru, in your opinion?

Jason Zandberg:    Yeah, I mean, the international markets are definitely interesting. The upside is pretty significant, but it’s, you know, it’s how to get product to market. You know, we haven’t seen huge volumes for exporting cannabis to other medical markets. Germany should have, you know, been a fantastic country, which that’s probably where most exports are headed to, but even there, you know, the numbers aren’t, you know, aren’t exceeding our expectations or even where we’d expect them to be at this point.

So international markets are tricky to play. We would expect long-term, most of the production would be within the country, so domestic production in whatever country goes legal, and that’s, you know, that’ll be up to how quickly licenses will be distributed in each one of the countries.

So you know, it’s like I said: there’s good upside on the international market, but it’s not a, there’s not a clear path as to how North American companies get there.

James West:   Okay. So in your comment initially, where you said that the Canadian large caps are disappointing because of their sort of shortfalls in reporting revenue as a result of Canadian legalization, and that driving your preference towards US MSOs, is that a temporary phenomenon in the Canadian sense because Canada is having the growing pains of this province-by-province distribution system? Or do you think it’s more a reflection of the idea that 80 percent of the cannabis being bought by recreational users in Canada is still coming from unlicensed sources?

Jason Zandberg:    Yeah, no, there’s definitely growing pains in the Canadian market. We do expect it to get back on track, you know, at some point in the next few years. You know, with October this year coming up, with the introduction of edibles, you know, that will see, you know, again growth in sales. And you know, I think Canada will eventually get there.

But one problem that I have with the Canadian market is, if you look at the government’s approach to legalization, it appears as though they’re more focused on controlling the market than expanding the market. In the US it’s the opposite; most governments look at it as a tax base and they want to grow that cannabis market. So you know, in my opinion, I think the Canadian government would rather see a $6 billion black market turn into a $4 billion legal market as opposed to, you know, creating a much bigger legal market.

Because you know, everything that has been getting in the way of this market expanding in Canada has been, you know, really slow licensing – I mean, licensing has picked up over the last couple of years, but it’s still, obviously we’ve got a supply shortage and they should have been licensing a lot faster, more rapidly, a year before the start of rec sales. And that’s really hurting this market. So if the government can sort of get it out of their way and allow this market to flourish, you know, we could see some better upside for sales. But I really don’t know if that’s their intent long term; I think they’re more focused on controlling the market than expanding it.

James West:   So we’ve got Canopy with a $20 billion-plus market cap thanks to the participation of Constellation Brands. You’ve got Aphria in some state of negotiations, still, with Green Growth brands; that could become something huge if you look at Green Growth’s, Peter Horvath’s former association with brands like Victoria’s Secret. Aurora still is sitting out there as this, you know, independent Canadian unicorn story in the cannabis space that doesn’t yet have a partnership with a major globalized branded element.

Is that something that could have a sector-wide positive catalytic influence on the Canadian market generally? Like, when we saw Constellation put the 4.5 billion into Canopy, it lifted the whole sector by collectively 30 percent over the next three months. Is that something that we might expect to see happen, should something materialize as a result of the participation of Nelson Peltz as advisor, who could probably bring something like that to the table for Aurora?

Jason Zandberg:    Yeah, yeah, no, anytime there are one of these, you know, transactions, it definitely is bullish for the entire sector. In terms of commenting about Aurora, you’re right, they don’t have a dance partner right now. You know, it’s likely that they have, you know, been in discussions with various third parties, and that’s just because there has been a lot of companies that have been sniffing around the Canadian market for a number of years, now. So yeah, it definitely would be a catalyst for the market, but in terms of timing or whether it will happen or not, you know, it’s hard to say at this point.

James West:   Sure. All right, that’s great, Jason. I appreciate your participation as usual. I look forward to talking to you next. Thanks for joining me today.

Original article: PI Financial Corp Analyst on Canada’s Disappointing Recreational Cannabis Sales

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