‘Massive & unsustainable’ value gap between Canadian, US cannabis firms, analyst notes

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Cannabis companies focused on the United States still have a “massive and unsustainable” valuation discount relative to their Canadian counterparts, according to a new report by Beacon Securities.

As of this week, companies with an operational focus on the United States are trading at about 13-times consensus estimates for their 2020 earnings before interest, taxes, depreciation and amortization (EBITDA), representing a 56% discount to the 30-times average for companies focused on Canada, according to Toronto-based Beacon.

And that’s months after cannabis capital started “rotating” away from Canada to the United States, CIBC World Markets analyst John Zamparo said at the time.

The Beacon report noted that U.S.-focused companies have a much larger addressable market than marijuana companies looking to capitalize in Canada.

“They can also offer broader product suites, and can participate more fully in the supply chain, which should translate to more sustainable business models with better margin potential,” according to the Beacon report.

“If the only rational justification for a multiple gap between U.S.-focused cannabis companies and Canadian companies is the fact that cannabis is currently federally illegal in the United States, will that change?

“We believe such change is inevitable,” the authors state.

The Beacon paper said investors in U.S.-focused companies are able to choose between multistate operators and others specializing in coveted markets.

The two major structural advantages the U.S. offers companies over Canada are:

  • Product breadth: Additional product forms – edibles, extracts and topicals – will be in short supply in Canada until sometime in 2020, after being permitted later this year.
  • Supply chain participation: Most major markets in Canada (except Quebec) now allow some degree of private sector retail ownership, but the distribution business is still largely government controlled, meaning provinces play a large role in setting market prices, and margins, in the regulated industry.

“The U.S. market offers investors multiple, major advantages over the Canadian market,” the report stated. “Nonetheless, there is a massive valuation gap between them. We believe regulatory progress, particularly at the U.S. federal level, is increasingly likely.”

That should spark a revaluation of American cannabis companies versus their Canadian peers, the authors wrote.

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