A new report from one of Canada’s top banks is bullish on the growth of that nation’s cannabis demand – but offers investors an assortment of sobering caveats.

Scotia Capital, a subsidiary of The Bank of Nova Scotia, one of the top five banks in Canada, initiated coverage of the marijuana industry with a positive outlook.

“Let’s be clear: the cannabis industry is real, it is here to stay, and we believe there is money to be made,” wrote the report’s authors, Oliver Rowe and Ben Isaacson.

Scotiabank also initiated coverage of Aphria and Canopy Growth – two of the top medical and recreational marijuana companies in Canada – calling them “trailblazers ahead of the curve.”

The bank also offers a pessimistic outlook for illicit sales, predicting they will make up just 20% of the overall market within three years.

However, Scotiabank also warns investors of a host of risks, including “inevitable” oversupply in the recreational market, price compression and a competitive illicit market, as well as competition from outdoor production, hemp-based CBD products and global imports.

On consolidation

Scotiabank sees the combined capacity of the three largest licensed producers – Canopy, Aurora and Aphria – as sufficient to supply the entire Canadian market. The bank predicts “excess capacity in the industry is an eventuality; the only question is when.”

“In our view, this will lead to consolidation through attrition rather than M&A deals as few producers will be in the market for more production assets,” the authors surmised.

On the United States

Scotiabank estimates the entire U.S. market – including illicit demand – at more than 65 billion Canadian dollars ($50 billion).

The bank sees legal cannabis in the United States as “increasingly likely” but not before cannabis is rescheduled from its current status as a United Nations Schedule I and Schedule 4 narcotic.

“The longer the U.S. cannabis market remains illegal at the federal level, the better off Canadian cannabis companies will be,” according to the report.

The bank warned investors that U.S. federal legalization could be “double-sided” for Canadian marijuana companies.

“On one hand, it would open up a much larger market opportunity, but on the other, Canadian LPs would no longer be insulated from U.S. competition,” the authors noted.

On cannabis beverages

The Toronto bank expects cannabis consumption in all its forms to compete seriously with beer and wine consumption in Canada within 10 years.

Highlighting Constellation’s deal with Canopy and Hexo’s with Molson Coors Canada, among others, Rowe and Isaacson believe global alcohol companies have identified cannabis “as an opportunity and possibly a threat.”

Their report points out that cannabis beverages could drive the “next big wave” of demand growth but warned there will be plenty of competition and only a handful of winners.

Matt Lamers can be reached at [email protected]



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