Competition Is Heating Up in the Marijuana Industry

Aphria Inc. (TSX:APH) issued equity to fund expansion plans, as capital injections are increasingly needed to fund massive growth potential in the industry.

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published December 14, 2017 12:00 pm EST

Growth and expansion in the marijuana industry is heating up at a feverish pace. And companies in this booming industry are working feverishly to gain the first-mover advantage and to solidify and secure their positions.

From consolidation to partnerships to supply deals, the industry is expanding its reach at a rapid pace.

With this, we can expect to see marijuana companies coming to the market for the cash to fund these deals.

Aphria Inc. (TSX:APH) announced a $100 million bought deal share issue yesterday, whereby the company is issuing 7.3 million shares at $13.75 a share, which is 9% lower than yesterday’s closing price of $15.15.

The stock is trading down more than 5% today off this news.

The money will be used to finance cannabis construction facilities in foreign and Canadian jurisdictions.

Before the issue, Aphria had $118 million in cash on its balance sheet. The company was free cash flow negative to the tune of $28 million last quarter, $63 million in the fourth quarter of fiscal 2017, and $34 million in the third quarter.

Recall that earlier this month Aphria announced a five-year agreement to supply Shoppers Drug Mart with medicinal marijuana. Although Loblaw Companies Ltd. (TSX: L) is still awaiting government approval to sell marijuana at Shoppers, this is a big deal.

Industry leader Canopy Growth Corp. (TSX: WEED) currently has $108 million in cash on its balance sheet, with negative free cash flow to the tune of $49 million in the latest quarter, $22 million in the first quarter of fiscal 2018, and $57 million in the fourth quarter of fiscal 2017.

Canopy’s most recent big news was the signing of a supply deal with Newfoundland, whereby Canopy will supply marijuana to the province once it’s legal, or, more specifically, 8,000 kilograms a year for two years.

Along with this, Canopy will build a $40 million production facility and invest $100,000 a year in research and development, which is to be matched by the province.

So, a lot of capital will be required going forward, as the company’s growth and expansion picks up.

Hydropothecary Corp. (TSXV:THCX), is also setting its sights high. The company recently announced massive expansion plans. It will be making a big investment to increase its production capacity to 108,000 kilograms of dried cannabis per year.

The company is in talks with the Quebec government with the hopes of securing a supply deal for that province.

So, while the industry is still emerging and taking shape, with many uncertainties as to the regulatory backdrop, as well as competitive forces and who the ultimate winners will be, one thing we can agree on is the explosive demand that the industry is faced with.