Canadian Cannabis Producers Are Dependent On Value Flower: Analyst

Canadian licensed cannabis producers have been faced with challenges imposed by ongoing price deflation, COVID-19 lockdowns and uncertainty over whether and when U.S. federal legalization will occur.

As a result, some Canadian cannabis companies have become dependent on value flower, according to a Cantor Fitzgerald analyst. 

The Cannabis Analyst

Pablo Zuanic discussed value flower dependency across Canadian LPs, citing Canopy Growth Corporation CGC WEED as the company with the highest exposure to the segment — with 48% of recreational cannabis sales coming from value flower (below $6 per gram) in the first quarter of 2021.

The Cannabis Takeaways

Canopy’s industry peers posted similar results, Zuanic said in a Thursday note.

About 39% of Aurora Cannabis' ACB recreational sales during the first three months of 2021 came from value flower, the analyst said. 

Village Farms International Inc.’s VFF VFF Pure Sunfarms and Aphria Inc APHA followed suit with 37% and 34% value flower shares, respectively, he said. 

Value flower exposure for HEXO Corp. HEXO, OrganiGram Holdings Inc. OGI and Sundial Growers Inc. SNDL is in the mid-20s, while exposure to value flower for Tilray Inc. TLRY and Auxly Cannabis Group Inc. CBWTF totals 10-11% of recreational sales, Zuanic said. 

Zuanic named three reasons why these percentages matter.

"Portfolio diversification across price tiers and formats" not only matters but is desirable, the analyst said, "especially for the larger LPs."

Cannabis companies that are too reliant on value may need to purchase premium brands, he said, citing Canopy's purchase of the Supreme Cannabis Company, Inc. FIRE SPRWF as an example. The cannabis giant recently merged with Supreme in a $345-million deal.

And lastly, Zuanic emphasized that "focus solely on value flower per se need not be a negative … if companies have the right cost structure."

Yet it can be an issue for companies with what he called a "sprawling" asset base or portfolio.

Zuanic projects that sales for 2021 will hit CA$4 billion ($3.27 billion), representing a year-over-year increase of 53%.

"As lockdown-related restrictions ease, a larger percentage of the population is vaccinated and more stores open, demand should start to pick up again," Zuanic said. 

Photo by Esteban Lopez on Unsplash.