Canopy hosted a tour on Tuesday of the Aldergrove facility (1.3m sq. ft.) and Delta facility (1.7m sq. ft.), including the post-harvest processes and extraction facility.
BC Tweed could produce 300 tonnes annually
Over time, the Aldergrove and Delta greenhouses could produce ~300 tonnes of cannabis per year. The facilities are ramping up production with only 400k sq. ft. of greenhouse currently unlicensed, the application for which has been submitted. With a number of harvests already under the belt, the ramp up focus is on increasing yields and shortening cycle time. WEED expects it can achieve an equivalent of over four harvests per year. Canopy has trimming and drying capacity to handle the full production of the BC Tweed facilities.
Production costs of $0.50/g achievable over time
Canopy has leveraged the learnings from its network of greenhouses in BC, Niagara and Quebec to improve efficiency across its production platform. 50 employees can handle a 400k sq. ft. greenhouse room, down from 300 previously, due to operational improvements and better timing of harvests. Post-harvest processes are another area seeing efficiency gains as WEED has recently had most of its permanent trimming and drying rooms licensed, removing higher costs associated with temporary infrastructure.
Building large-scale extraction capacity
The company is building an extraction facility at the Aldergrove site with the intention of bringing all extraction in-house over the long-term. Construction is expected to be complete by July and the facility is expected to be licensed and operational by September 2019. Proprietary equipment has been ordered that will streamline the extraction process in a number of ways, including machinery that will mill and decarboxylate cannabis in one step.
Readiness for cannabis 2.0 is apparent
WEED has had a number of prototypes for vape pens and beverages ready for some time. In addition to vape pens and edibles, the company plans to release six beverages that will cater to different demographics (such as age) and different use cases (such as energetic or relaxed). The company has sent proposed pricing for these new products to some provinces.
Recommendation and valuation
Maintaining BUY rating and $72.00 target
The BC greenhouses appear to be running smoothly across all areas of production, trimming and drying. We value Canopy using a sum-of-the-parts with pro-forma share count assuming the Acreage acquisition closes. We value Acreage at 22x consensus 2021 EBITDA of US$292m for a value of $15.00 per pro-forma share. Our valuation of Canopy’s legacy operations is unchanged at $31b (or $56.00 using a pro-forma share count) and derived using a DCF calculation with the following: 1) a 7.5% discount rate, 2) a 28% share of the recreational market, (3) a 28% EBITDA margin, and (4) a 3.2% terminal growth.