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Canopy Growth Corp. (WEED.TO)(CGC) leads its peers when it comes to automation and value-added manufacturing, according to a pair of BMO Capital Markets analysts who visited the cannabis giant’s headquarters on Thursday.
Tamy Chen and Peter Sklar said advancements in Smiths Falls, Ont., put Canopy Growth in a strong position to capitalize on the much-anticipated roll-out of additional retail stores in key markets like Ontario. But until that happens, the analysts expect stronger revenue will be a tall order.
“Until there is a meaningful acceleration in the roll-out of retail stores, we continue to believe near-term revenue growth from current levels could be challenging for Canopy,” Chen and Sklar wrote in a research note on Friday.
Speaking on a conference call with analysts following Canopy Growth’s first-quarter earnings last month, chief executive officer Mark Zekulin singled out Ontario and Quebec, Canada’s two most populous provinces, for having just one store for every 595,000 and 495,000 people, respectively. California, for example, has one store per 10,000 people, he noted.
Last Thursday, an Ontario judge froze the province's cannabis retail licensing process for at least two weeks, following a legal challenge from disqualified lottery winners. Justice David Corbett said he will rule on Sept. 25 on whether 11 disqualified winners should resume the application process for a licence in Ontario, or let people on a waiting list take their place.
The delay is the latest in a long line of hiccups in the province that have hampered robust brick-and-mortar sales.
Quebec’s fully government-run system has also seen a limited number of physical stores open since recreational legalization.
Like many of its peers, Canopy Growth has high hopes for the next generation of cannabis products expected to hit the market in December. The company said in mid-August that it expects its cannabis beverage bottling line to be operational by late October, and expressed confidence that beverage, vape and edible production will begin in its fiscal third quarter.
Chen and Sklar said they also observed a “meaningful increase in the level of automation as a result of recently installed, commercial-scale packaging equipment for pre-rolls and dried flower.”
“Following our visit of Smiths Falls’ advanced manufacturing building, we believe Canopy’s progress so far in developing value-add manufacturing capabilities is more advanced than what we have observed at other licenced producers’ facilities,” Chen and Sklar wrote.
The analysts said they are cautiously awaiting the impact of the first batch of vapes, edibles, topical and beverages that licenced producers sell to provincial distributors, warning of underdeveloped supply chains and new manufacturing complexities.
“We remain neutral as we believe the initial launch of value-add products will likely be challenging for both top-line growth and margins,” they wrote.
Chen and Sklar maintain a “market perform” rating on Canopy Growth shares and a $40 price target. Toronto-listed shares fell 3.92 per cent to $33.55 at 12:01 p.m. ET on Friday. New York-listed shares declined 4.10 per cent to $25.26 at 12:17 p.m. ET.