CA - Oh No Canada

Summary

• Not a ton of great news out of the Canadian cannabis sector.
• Dispiriting earnings, layoffs and more reasons to be bearish.
• Optimism on select stocks.

Alan Brochstein , who will be on this week's podcast, talked about how he used to pray to Canada because of all the money it brought into the cannabis industry. Recognizing things are now a bit less celestial, he remains bullish on a few names, Village Farms ( VFF ) being one:

Village Farms has rallied from the recent low, but it has pulled back a bit. The stock, in our view, is an extreme value. The reason for the pullback was an equity offering with warrants, and the stock now trades at just 0.5X tangible book value. The company is not entirely focused on cannabis, but we believe that the cannabis business alone is worth substantially more than current valuation.

and Cronos ( CRON ):

We are big fans of Cronos Group's stock, which made a multi-year low. The company has a lot of cash and no debt, and its revenue has been growing and its profitability improving.

Organigram ( OGI ) is another favorite that he discusses in depth on the podcast ( "If you look at the revenue, everybody's losing share, but not Organigram" ) along with its favorable debt to cash profile (also look out for our upcoming interview with OGI CEO Beena Goldenberg).

On the other side of things, a Canadian stock that analysts are quite bearish on, Canopy Growth ( CGC ), announced dispiriting Q3 earnings last Thursday. The CEO laid down some negative sentiments:

As a global first mover, the legal Canadian cannabis industry was originally projected to grow into a CAD7 billion market over time, however, that market aspiration has not come to fruition.

Today, there are two very different cannabis markets in Canada; one that's legal, highly taxed and regulated, and one that's thriving in illicit. The unregulated illicit market is generating billions of dollars of revenue with a 40% market share, and faces virtually no risk of enforcement.

The legal sector out of necessity, is forced to be price-competitive with an illicit market that does not pay excise taxes, does not pay provincial board markups, and is not restricted in the products and pricing that they offer.

The competition with the illicit market, compounded by an overbuilt legal cannabis industry, has caused price compression across the board. We expect the sector challenges to remain for years to come and as a result, the sustainability of this legal sector is in question.

Sharing in negative sentiment is Stone Fox Capital who wrote this after CGC's earnings release:

Even the once-promising International cannabis business saw revenues slip 54% to only C$5.8 million. Canopy Growth only produced a 1% adjusted gross margin in the quarter in another sign of the struggles of a business with no profit driver to fund growth in any other sector.

The new reset has Canopy Growth starting more initiatives to reduce annual CoGS and SG&A by a combined C$140 to C$160 million. The overall plan since the reductions announced last April amount to C$240 to C$310 million in cost reductions.

The problem is that Canopy Growth will only strip out C$40.0 million in additional quarterly costs from a business currently with an adjusted EBITDA loss of C$87.5 million.

CGC earlier this month divested from its Canadian retail operations and most recently announced plans to close multiple production facilities, reduce its staff count and move to a third-party sourcing model, pursuing an asset-light model in Canada.

More CGC pessimism came from Trapping Value post-Q3 release:

CGC's debt exchange maneuver has prevented this cash drop from becoming catastrophic. But the rest of those bonds are still coming due in 6 months. Assuming that $455 million is paid off - and the bonds certainly believe this will happen - we will be down to $333 million of cash and short term investments. CGC burns through $100 million in a run of the mill quarter, although the announced restructurings will make this a more volatile number. Nonetheless, we think this is coming to a climax soon. That is because there are other hurdles for Canopy Growth Corporation to make it over the next year.

In issues of reining in costs, restructurings and layoffs, Canopy is by no means alone. This week Canadian operator Aleafia Health ( ALEAF ) announced :

Some of the more notable cost rationalization initiatives include: a 20% reduction in headcount quarter-over-quarter, resulting in $2.5 million in annualized cost-savings; IT enhancements, including completing the first phase of our ERP roadmap; and consolidating certain vendor relationships to procure their goods across each of our physical facilities and utilize their services across all three of our core sales channels.

Sundial ( SNDL ) had similar bad news :

SNDL on Monday announced changes to its operations through a rightsizing of cannabis cultivation in Olds, Alberta, citing surplus of cannabis and excess capacity in the Canadian market.

The company said it would eliminate 85 positions and materially reduce staffing and activity levels in order to improve efficiency.

"We estimate that more than 1 billion grams of flower are sitting in Canadian vaults today. Oversupply and excess capacity have resulted in high-quality flower being widely available and sold well below the marginal cost of production," SNDL CEO Zach George said.

Aurora ( ACB ) also released earnings last Thursday - revenue edged higher, debt was reduced a bit, along with a plethora of bad news. Leo Imasuen spelled it out :

The Canadian cannabis company recently reported earnings which saw modest revenue growth but with medical cannabis sales declining by 14% from its year-ago comp.

Net losses were high, and cash burn from operations grew nearly 3x from its year-ago quarter...

Aurora Cannabis has slipped below Nasdaq's US$1 minimum listing requirement after nearly two years of its commons declining. The switch from euphoria to dread has come at a high cost for the company, which has seen its market cap fall to US$300 million...

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