Slow start to recreational cannabis sales not a concern, GMP says

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Health Canada has released market data on cannabis sales for November, the first full month of the legal market. The numbers suggest a run rate of about 5,400 kg monthly or 65 tonnes annually, which is lower than expected, says analyst Martin Landry of GMP Securities, but potentially reflective of a sluggish start to the industry.

As part of the system to prevent legal cannabis from being diverted into the illegal market, the federal government operates a Cannabis Tracking System with a mid-month deadline for license holders and provincial bodies to submit their monthly reports.

The November tally shows 3,726 kg of dried cannabis in the medical market and 5,146 kg in the recreational market for a total 8,872 kg, a 22 per cent increase over October (with legal rec sales beginning on October 17). Cannabis oils on the medical side were 5,926 litres and 1,879 litres on the rec side, a 14-per-cent month-over-month increase.

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That works out to about 5,400 kg a month in sales, which is on the small side compared to industry estimates, says Landry.

“At first glance, November recreational cannabis sales look light versus our expectations of 300 tonnes to be sold in 2019,” said Landry in a research note to clients on Wednesday. “However, the slow start is not a complete surprise as this data reflects the logistical challenges which occurred during the first months post legalization.”

The analyst pulls three takeaways from the data: (1) inventory is building up, suggesting that December could be a stronger month; (2) industry growing pains rather than a lack of demand is the likely culprit of the slower sales; and (3) medical sales grew by about 30 per cent, an unexpected but potentially lucrative trend, as medical sales have higher margins.

“Overall, we believe that recreational sales are bound to experience several months of hyper growth driven by better inventory levels, an extensive roll-out of the retail network and the arrival of edibles and vape pens which could stimulate demand. Hence, we are not concerned with our 300 tonne forecast. In our view, once the Ontario retailers are operational in April and May, we will have a better picture (while not perfect) of the market demand,” says Landry.

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