Canadian bank’s bullish cannabis report comes with significant caveats

A brand new report from one among Canada’s prime banks is bullish on the expansion of that nation’s cannabis demand – however presents buyers an assortment of sobering caveats.

Scotia Capital, a subsidiary of The Bank of Nova Scotia, one of many prime 5 banks in Canada, initiated protection of the marijuana business with a constructive 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 additionally initiated protection of Aphria and Canopy Growth – two of the highest medical and leisure marijuana corporations in Canada – calling them “trailblazers ahead of the curve.”

The Toronto financial institution forecasts a surge in demand in 2019 and 2020 to about 1 million kilograms (2.2 million kilos) and 1.13 million kilograms, respectively, pushed by new product codecs, new shoppers and better day by day utilization.

The financial institution additionally provides a pessimistic outlook for illicit gross sales, predicting they may make up simply 20% of the general market inside three years.

However, Scotiabank additionally warns buyers of a number of dangers, together with “inevitable” oversupply within the leisure market, worth compression and a aggressive illicit market, in addition to competitors from outside manufacturing, hemp-based CBD merchandise and international imports.

On consolidation

Scotiabank sees the mixed capability of the three largest licensed producers – Canopy, Aurora and Aphria – as  enough to provide your complete Canadian market. The financial institution 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 complete U.S. market – together with illicit demand – at greater than 65 billion Canadian dollars ($50 billion).

The financial institution sees authorized cannabis within the United States as “increasingly likely” however not earlier than cannabis is rescheduled from its present standing as a United Nations Schedule I and Schedule four narcotic.

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

The financial institution warned buyers that U.S. federal legalization could possibly be “double-sided” for Canadian marijuana corporations.

“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 famous.

On cannabis drinks

The Toronto financial institution expects cannabis consumption in all its varieties to compete significantly with beer and wine consumption in Canada inside 10 years.

Highlighting Constellation’s deal with Canopy and Hexo’s with Molson Coors Canada, amongst others, Rowe and Isaacson consider international alcohol corporations have recognized cannabis “as an opportunity and possibly a threat.”

Their report factors out that cannabis drinks might drive the “next big wave” of demand progress however warned there might be loads of competitors and solely a handful of winners.

Matt Lamers might be reached at [email protected]

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