Canopy Growth Corp’s Quebec cannabis deal gets thumbs up at GMP

A deal to supply marijuana to Quebec overshadows what GMP Securities analyst Martin Landry describes as “mixed” third quarter results for Canopy Growth Corp. (TSX:WEED).

This morning, Canopy Growth reported its Q3, 2018 results. The company earned $11.01-million on revenue of $21.7-million, a topline that was up 123 per cent over last year’s third quarter, which came in at $9.8-million.

“The company’s record revenues in the quarter were driven by a significant increase in domestic sales across all product formats as well as sales in the German medical market, which is beginning to show impressive growth,” said CEO Bruce Linton. “Success in future global medical markets and the recreational cannabis market in Canada will depend not only on capacity, but on strong execution and securing supply agreements with the provinces today. I believe our success on both these fronts is evident as you look at our accomplishments this past quarter. With the sector’s largest inventory of diversified, high-quality cannabis products, demonstrated distribution capabilities, robust IT infrastructure, a vast production footprint, investments in seven provinces across the country, and a proven record of leadership and execution, we are now excelling into the anticipated recreational sector with unparalleled opportunity. With millions of square feet of production expansion under way across the country and around the world, as well as capacity offtake from our expanding roster of CraftGrow partners and through Canopy Rivers Corp., we will ensure a sufficient and timely flow of supply to serve our lineup of unparalleled premium brands.”

Earlier Tuesday, Canopy announced it had signed a letter of intent with the Societe des alcools du Quebec (SAQ) to provide the Quebec market with 12,000 kilograms of high-quality cannabis annually.

“We’ve made major investments in the province of Quebec and feel honoured to be chosen to supply the country’s second-largest province, and a region we call home, with our wide variety of cannabis products,” said president Mark Zekulin. “Signing this letter of intent with SAQ further establishes our dedication to the region and our level of commitment to providing adult consumers in Quebec with safe, high-quality cannabis.”

Landry says despite a quarter he describes as “mixed” (revenue was higher than his expectation, but the average price per gram was lower than he had modeled), he feels the day’s developments were positive because the SAQ contract provides visibility on recreational market.

“Management expects the contract with the SAQ to offer economics similar to current adjusted gross margins levels of ~70%,” the analyst says. “This under the assumption that edibles will be allowed one year post the opening of the recreational market. Edibles and infused drinks are expected to provide appealing margin profile. Management indicated during the earnings call that the company could turn EBITDA positive in H2/CY18, which is aligned to our expectations. Management expects a significant rise in sales starting in August 2018 as the company will need to fill the distribution channels at the provincial level. We would expect the shares to react positively to management’s comments during the earnings call.”

In a research update to clients today, Landry maintained his “Buy” rating and one-year price target of $40.00 on Canopy Growth Corp., implying a return of 49.7 per cent at the time of publication.