Can This Alberta-Based Cannabis Retailer Still Thrive in Ontario?

Alcanna Inc. (TSX:CLIQ) has been dealt a bad hand in Ontario but could still find a way into the lucrative retail market in 2019.

| More on:

Aurora Cannabis stock rose 3.39% on December 11. Shares have dropped 15.2% over the past month. Aurora owns a 25% stake in Alcanna (TSX:CLIQ), an Edmonton-based alcoholic beverage and cannabis retailer. Shares of Alcanna have plunged 28.5% over the past month.

Aurora and Alcanna have made aggressive moves in Alberta’s retail network. Alberta and Ontario were the only two provinces to commit to an entirely private cannabis retail network. Early reports suggest that Alcanna has seen impressive traffic in its retail stores in the weeks following recreational legalization. Alcanna-owned NOVA Cannabis stores reported $3.7 million in sales in the first 19 days of legalization.

After the Ford-led government in Ontario revealed that it would pursue a private retail cannabis model, Alcanna reportedly made early inquiries. At the time it was unclear what form the retail framework would take. However, there were early indications that Ontario would seek to favour smaller retailers and hinted that it would look to limit the ability of large producers to establish a retail monopoly.

In mid-November the Ontario government gave some much-needed clarity to its retail framework. The government announced that retail licences would not be issued to corporations if more than 9.9% of its ownership is controlled by one or more licensed producers. This framework would take Alcanna out of the running for retail licences in Ontario.

Canopy Growth will also be impacted by the new rules, as it hoped to establish a strong retail footprint through subsidiaries. However, Canopy and Aurora have both stated that other avenues to the retail network in Ontario are open. Alcanna leadership suggested that it could pursue the creation of an independent entity that would be 39.9% owned by the company. That would reduce Aurora’s ownership below the 9.9% threshold and open access to the Ontario market.

Applications for retail licences are set to open on Monday, December 17 in Ontario. Access to this highly lucrative market will be a high priority for the largest licensed producers, even in the face of barriers erected by the Ford government. Should investors bet on the Aurora-Alcanna tag team as we look ahead to 2019?

Alcanna is still weighing its options ahead of the December 17th date, according to recent reports. Its third-quarter results, which saw sales increase marginally year over year, did not include results from after recreational legalization. Investors will have to await the release of its fourth-quarter and full-year earnings.

If we take a snapshot of its technicals as of close on December 11, Alcanna looks like a tempting buy. It currently boasts an RSI of 24, which suggests it is oversold. The stock last paid out a quarterly dividend of $0.09 per share, which now represents an attractive 5.7% yield. However, this dividend payment could conceivably be at risk as Alcanna may seek new financing to power growth next year.

Alcanna will continue to be subjected to volatility in the cannabis market, but early results in Alberta suggest that it should see a boost in Q4 2018. However, the company will need to scale up its operations in order to reach its potential after legalization. The stock is worth a speculative buy as it hovers around a 52-week low.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan owns shares of Aurora Cannabis.

More on Investing