Cannabis Sector
14 Apr 2021
So far, the second quarter of 2021 has proven to be challenging for Canadian Licensed Producers (LPs). After Aphria (APHA.TO) (APHA) and Organigram Holdings (OGI.TO) (OGI) reported weaker-than-expected quarterly financial results, the cannabis sector has been under considerable pressure and this is a trend that we are closely following.
Although the lower-than-expected revenue numbers are concerning, we find the risk of further price compression to be the most significant headwind for the Canadian cannabis industry. Over the next year, we expect the companies that took action to right size the business to be in line with consumer demand to outperform the companies that did not take such actions.
During Aphria’s post-earnings conference call, the management team highlighted the risks that are associated with price compression. Aphria CFO Carl Merton stated that Canadian LPs that did not lower production costs and right size the business will face large cash burns and we agree with this statement.
Organigram’s earnings report was far from pretty and the market responded negatively to the results. When compared to the same period last year, net revenue declined due to significantly lower wholesale revenue and a lower average selling price. The quarter was also impacted by COVID as several employees tested positive for the virus. As a result, Organigram’s net revenue was impacted by missed sales opportunities due to production and processing constraints.
The COVID outbreak impacted Organigram’s ability to fulfill certain demand for its products (totaling approximately $7 million of revenue). One of the trends that both Organigram and Aphria highlighted is related to decreasing demand for cannabis at the provincial level. For Organigram, Alberta’s goal to manage lower levels of inventory has negatively impacted the business and we will monitor how other Canadian LPs are impacted by this trend.
Between price compression and lower demand from Canadian provinces, cannabis producers are facing major headwinds in the coming quarters. Over the next year, we expect the operators with leverage to strategic markets like the European Union (EU) or Latin America to outperform companies that are primarily focused on Canada.
With broker-dealers issuing downgrades and slashing price targets on Canadian LPs, we continue to prefer the US market to Canada. We expect to see banks continue to downgrade Canadian levered cannabis companies and this is a trend to be aware of.
https://www.technical420.com/cannabis-article/5-major-organigram-price-target-changes-investors-need-to-know/#
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