Tim Boreham Criterion columnist
Melbourne
With the ASX-listed cannabis sector in a sharp retreat since late March, the next six months or so will determine whether the extraordinary interest in pot stocks turns out to be just another craze, or something of more substance (so to speak).
Paradoxically, the sell-off has come as the pot companies position themselves with almost daily announcements about regulatory approvals, clinical programs or new tie-ups with offshore partners. Claims about being “sector first” — whether in growing or importing the stuff or developing specialist applications — abound.
Frankly, it’s hard to see through the fug of claims and counterclaims, but some strategy trends are emerging, such as the “mission creep” from the medical to recreational markets.
When Phytotech, now MMJ Phytotech (MMJ), blazed the path as the first listed pot stock in early 2015, management stressed its focus on serious medical cannabis applications. Now, MMJ Phytotech is proudly targeting the Canadian medical and recreational markets, which is expected to have a combined value of $8 billion to $9bn by 2024.
A new entrant, The Hydroponics Company (THC), is equally agnostic. While THC aims to produce high-quality pharma-grade products, its core (and profitable) activity is supplying the hydroponic and other equipment and nutrients to cultivate the coveted herb.
This activity does not discriminate between medical and recreational crops.
Andrew Beehag, chief at THC offshoot Canndeo, says Donald Trump’s presidential win overshadowed a concurrent vote in seven states (including California) to legalise adult recreational use. From July next year, recreational use will also be allowed in Canada, also a leader in medical cannabis.
“We are not just looking at the Australian medicinal market,’’ he says. “There is a large market for recreational cannabis.”
Unusually for the sector, THC’s equipment side means the company has been operating profitably for five years, with expected current year earnings of $1 million rising to $3m next year.
While the early emphasis was on the legal local medical sector, they now stress their international activities and partnerships. Recent federal and state reforms means medical cannabis is decriminalised in most geographies. But supply will be tightly controlled through authorised GPs and specialist who appreciate the myriad therapeutic effects of the weed.
Of all the cannabis stocks, Cann Group (CAN) arguably is the most locally focused. Having only listed last month, Cann became the first pot stock to secure a commercial growing permit from the Office of Drug Control (seven have been issued to date).
Separately, Auscann (AC8) recently was granted a licence to grow a stash of medical cannabis in WA. Auscann is also highly credentialled, in that founder and chairman Mal Washer was health minister in the Howard government era. His daughter, Elaine Darby, is CEO.
Meanwhile, our dope pioneer MMJ recently imported its first medical cannabis shipment into the country, via local distribution partner HL Pharma. MMJ’s Swiss subsidiary Satipharm makes the pills which treat a variety of conditions. And speaking of the hilly landlocked nation, Creso Pharma (CPH) has signed a letter of intent with Swiss firm Cannapharm to supply medical cannabis to seven Asian Pacific and Latin American countries.
While the potential size of the local medical market is guesstimated at $100m-$400m, the US market for legal recreational and medical cannabis is forecast to be worth $US20bn ($26bn) by 2021. The medical stuff is already legal in 29 US states and in 16 other countries including India, Israel and The Netherlands.
Auscann also has ties with Canada’s Canopy Growth (the biggest producer of medical cannabis in North America) and Chilean grower Daya Cann.
When sizing up the pot plays, the other thing to watch is an emerging dichotomy between those simply growing and supplying the stuff and those pursuing specific medical indications. For instance, the commercialisation plans of the Europe-based MGC Pharma (MXC) are based on Dermaplus, a range of skincare products. MGC has unveiled a collaboration with RMIT University “on a full suite of medicinal cannabis research initiatives”.
But just as the graphite and lithium booms drew a lot of hangers-on, the dope sector has also won its fair share of opportunists. Cannabis-infused honey, anyone?
Casualties will emerge. But the pullback from such heady valuations shows investors are taking a more clear-headed approach. That means only the stocks with a cogent story will be rewarded. Tim Boreham is an analyst with Independent Investment Research. The Weekend Australian accepts no responsibility for stock recommendations.
MXC Price at posting:
4.3¢ Sentiment: Buy Disclosure: Held
