The birth of the legal cannabis industry in Canada is akin to the gold rush, but very few companies will live up to their lofty expectations, according to a new report from one of the country’s largest banks.

CIBC World Markets, a subsidiary of the Canadian Imperial Bank of Commerce, made the sobering assessment Friday in a report in which it also initiated coverage of Canopy Growth, Cronos Group and Aphria.

CIBC expects only a handful of players to end up dominating the global cannabis market.

“We believe Canopy and Cronos are likely to be two of those winners,” according to the report, titled, “The Beginning Of A Global Seismic Shift.”

Read the full report here.

Key trends

The report highlights several key trends in the industry such as capital flows to the United States, reversing a tendency over the past year of money moving north.

“An increasing number of sophisticated investors are beginning to shift capital to U.S.-based operators,” the report said, naming as examples well-capitalized businesses such as MedMen, Green Thumb Industries, Curaleaf, Trulieve and Acreage Holdings.

“But this does not mean Canadian companies will be shut out of the U.S. market,” the report continued. “We expect capital investments and acquisitions to take place, while still remaining onside with U.S. laws.”

Derivative products are where the market is headed, the report continued.

“The concept of product mix is incredibly important in cannabis as the margin profiles can vary differently for individual products,” the report stated.

It said the focus would likely move from discussion of price and cost per gram to price and cost per serving as consumer preferences shift toward alternative products.

More mainstream, large companies also are expected to make a splash in the cannabis industry.

“Constellation Brands and Altria Group have made the first steps, but it is our opinion that the industry will see far more, as cannabis undergoes destigmatization and normalization,” wrote the report’s author, John Zamparo.

Market leaders

Which company has the best opportunity to become a global – or at least national – titan?

The CIBC predicts that will be determined by licensed producers with the strongest management teams.

“To this point, it does not surprise us that the two largest investments made to date in this industry have featured Constellation Brands and Altria, giants in the beverages and tobacco world, choosing Canopy Growth and Cronos Group,” the report stated.

CIBC did not initiate coverage of Aurora Cannabis – Canada’s other “cannabis titan.”

The CIBC report also warned that its estimates for producers’ sales and earnings before interest, tax, depreciation and amortization (EBITDA) are below the sum of consensus forecasts.

For example, the consensus for cannabis sales in 2020 is 5 billion Canadian dollars ($3.8 billion).

But CIBC sees sales coming in at just over CA$4 billion. The consensus EBITDA is about CA$2 billion, with CIBC’s estimate at roughly CA$1.2 billion.

The report highlights the importance of brands while conceding that developing recognizable ones in Canada is a challenge because of onerous regulations. Companies face restrictions on branding and packaging.

“Conversely, it’s also true that the popularity of the top brands can turn on a whim,” the report stated.

“There is an argument to be made that this presents significant risk to any company’s M&A strategy when it comes to seeking out the best targets; but an equally compelling argument can be made that this underscores the need for incredibly strong balance sheets in order to succeed.”

Cronos is traded on the Toronto Stock Exchange (TSX) and the Nasdaq under the ticker symbol CRON.

Aphria trades as APHA on both the New York Stock Exchange (NYSE) and TSX.

Canopy Growth’s shares trade on the NYSE under the ticker symbol CGC and on the TSX as WEED.

Matt Lamers can be reached at [email protected]



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