Pot Stocks Tumble as Ontario Delays Rollout of Stores to 2019

(Bloomberg) -- Canadian pot stocks retreated Tuesday after the country’s largest province said it will delay the launch of bricks-and-mortar cannabis stores until six months after legalization.

Canopy Growth Corp. fell 5.7 percent, Aphria Inc. lost 5.3 percent and Aurora Cannabis Inc. slid 4.7 percent at 10 a.m. in Toronto. The BI Canada Cannabis Competitive Peers index fell 1.5 percent to the lowest since November, bringing its total loss this year to 44 percent.

Ontario’s Progressive Conservative government said Monday it will start cannabis sales with an online-only retail model when marijuana is legalized on Oct. 17, followed by private retail sales on April 1. This is an abrupt policy change from the former Liberal government, which planned to sell cannabis in government run stores, starting with 40 in 2018.

The move represents “short-term pain, long-term gain” for Canadian cannabis companies, said Canaccord Genuity analyst Matt Bottomley.

“We believe a shift to a private-sector model will likely further complicate an already challenging process and result in a slower ramp for rec sales in Ontario,” Bottomley wrote in a note to clients, adding that the April 1 date may not be realistic. However, should Canadian companies be included in the consultation process, they could achieve higher margins over the long term as they benefit from a vertically integrated business model.

Higher Margins?

The private retail model will require new legislation, creating uncertainty around the structure and timing of the rollout, said GMP Securities analyst Martin Landry.

“A delay of six to nine months in the opening of retail stores is likely to dampen recreational cannabis sales at the onset in Ontario,” Landry wrote. “Longer term, private retail could be more effective than a government monopoly to capture black-market share, and could result in more locations.”

Landry said Cronos Group Inc., Canopy and Aurora are likely to be some of the biggest beneficiaries of the private retail model.

Ontario is one of the last provinces to announce a plan for pot sales as Canada becomes the first Group of Seven country to legalize recreational use nationally. Models vary, with Alberta approving privately run stores and Quebec selling through its government alcohol agency. In Ontario, the government-run Ontario Cannabis Store will provide the online platform for retail sales and will also be the wholesaler once private stores open.

Legal sales are expected to reach $4.9 billion by 2022, according to a report by U.S. cannabis research firms Arcview Market Research and BDS Analytics.

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Jacqueline Thorpe, Steven Frank

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