Canopy Growth Has Eyes on the Global Cannabis Crown

Canopy Growth Corporation (TSX:WEED) continues to expand and partner, aiming to be a global cannabis leader

SmallCapPower | April 13, 2018: Canopy Growth Corporation (TSX:WEED), through its subsidiaries, produces and sells medical cannabis in Canada under several brand names, including Tweed, Spectrum Cannabis, Bedrocan, and Mettrum. Headquartered in Ontario, the Company has an early-mover advantage in the Canadian marijuana market. Canopy Growth offers dried, oil and softgel cannabis products and sells its products both online as well as in physical ‘brick and mortar’ locations.

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Canopy Growth’s TSX market capitalization of $5.5 billion makes it the most valued public cannabis company in Canada. The Company aims to be the world leader in cannabis production, both medical and recreational, by offering quality products.

Investment Thesis

  • Strategic alliances for business growth
  • Production capacity expansion measures
  • Significant international presence

Strategic alliances for business growth

Canopy Growth Corporation’s strategy is to be a cannabis market leader – medical and recreational – across Canada and beyond by focusing on the creation of high-value branded offerings in multiple formats. Canopy Growth is exploring partnership opportunities and is actively seeking supply arrangements.

In December 2017, Canopy entered into a supply and production agreement with the Province of Newfoundland and Labrador. The Company will provide up to 8,000 kg of high-quality cannabis products annually for the first two years. According to the terms of the agreement, Canopy Growth will set up a new production facility in Newfoundland and Labrador, capable of producing 12,000 kg per year. Furthermore, Canopy Growth’s wholly-owned subsidiary, Tweed Inc., is entitled to apply for operating four new retail locations in the province.

In November 2017, Canopy Growth entered into a strategic relationship with Constellation Brands, a leading alcohol supplier in the United States. Pursuant to the deal, Constellation Brands acquired a 9.9% equity stake in Canopy Growth. Through this partnership, Constellation Brands is expected to offer wide support in the areas of consumer analytics, market trending & branding, to Canopy Growth.  Importantly, Canopy Growth and Constellation Brands plan to collaborate to develop and market cannabis-based beverages.

In February 2018, Canopy Growth signed a letter of intent with the Société des alcools du Québec’s to provide the Quebec market with 12,000 kg of high-quality cannabis annually. Earlier this year, Canopy Growth signed a Memorandum of Understanding (MOU) to guarantee a regulated supply of cannabis to the Province of Prince Edward Island’s retail and online stores. As per the MOU, Canopy Growth will allot at least 1,000 kg of high-quality cannabis for the first year of the agreement to ensure that the Province has access to a wide variety of cannabis products. The two-year supply agreement will renew for a third-year upon agreement by the Company and province.

Production capacity expansion measures

Canopy Growth Corporation operates licensed cannabis production facilities in locations across Canada, including four sites in Ontario (Smith Falls, Niagara-on-the-Lake, Scarborough, and Bowmanville South), one in Saskatchewan, and one in Quebec. Overall, including partial ownership and joint ventures, the approximate area of Canopy Growth’s fully or partially-owned facilities (both operational and under development) total 5,675,000 square feet (includes unlicensed area).

Continuing its capacity expansion measures, Canopy Growth entered into a definitive agreement in October 2017 to form a new company, BC Tweed, together with a large-scale greenhouse operator to develop 1.3 million sq. ft. of greenhouse growing capacity in British Columbia with an exclusive option to develop a further 1.7 million sq. ft. of existing greenhouse infrastructure at a second BC location. Currently, Canopy Growth owns a 66.6% interest in BC Tweed.

Additionally, Canopy Growth and its subsidiary Canopy Rivers entered into an agreement with Les Serres Stéphane Bertrand Inc. (a large-scale tomato greenhouse operator in Mirabel, Quebec) in December 2017 to form a new company, Vert Mirabel. Bertrand’s 700,000 sq. ft. of modern greenhouse will be upgraded and retrofitted for cannabis production by April 2018, and Canopy Growth expects commencement of production by May 2018. Canopy Growth has a 40.7% interest in Vert Mirabel while Canopy Rivers has a 26% stake.

Significant international presence

Canopy Growth Corporation has obtained the necessary agreements to export medicinal cannabis to Australia, Brazil and Germany through its international subsidiaries and partners. To date, the Company has operations in Germany, Chile, Denmark, Jamaica, Australia, Brazil and Spain through acquisitions, partnerships, or alliances such as Spektrum Cannabis GmbH, Spectrum Chile SpA, Spectrum Denmark ApS, Tweed JA, AusCann Group Holdings Ltd., Alcaliber S.A., Bedrocan Brasil S.A. and Entourage Phytolab S.A., and Victoria Agriculture. International agreements are important as the opportunity for demand in Canada could become limited as more larger players like Canopy continue to grow their ambitious production goals.

Outlook and Valuation

Canopy Growth Corporation currently trades at a market capitalization of $5.5 billion. The Company trades at a premium on all metrics, at 5.6x 2020E EV/Sales and 23.2x 2020E EV/EBITDA compared to peers’ which trade at a median of 2.0x and 5.6x, respectively. Moving forward, the Company plans to continue taking all the necessary steps to be a market leader in the cannabis industry – be it scaling up of production facilities, partnering with other firms, diverse product portfolio, expanding global presence or employing technology in selling its products (i.e. online selling platform).

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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