Week 16

Update for Cannabis Industry between March 2nd and March 6th.

No M&A activity in Canada for this week, so I decided to look more into current trends which is shipping.

With recent news between Iran/Israel/USA and other countries it is clear that oil prices will be high for sometime. This challenges our current economy as it depends highly on oil (we have to ship items from one place to another). 

How does this impact Cannabis Industry @Canada?

To start off, let's use base year as 2025 where logistics expenses represent about 0.60 to 0.80 per gram (including compliance, shipping and testing). This essentially represents about 12-16% of retail price or 19-25% of wholesale value. Going a bit deeper into COGS where excise tax usually represents about 40-45% of COGS and production at about 0.70 a gram which puts us roughly at COGS of about 2.5$ a gram. 
The last thing to consider is SG&A, where excise tax represents roughly 75% of SG&A, which would put us at 1.33 per gram. 

With a wholesale price typically being 4.00 to 4.50 per gram, this would put our EBITDA at about ~15%.

Now let's look what happens with our EBITDA given the new confrontations in the world.

Currently in Canada, the average diesel price is about 160 cents per liter, where in some provinces it can go as high as 177 (Montreal) and as low as 138 (Saskatchewan).

As we know, Canada produces enough diesel to sustain itself for sometime, but it also relies on on imports for regional balancing.

When we take a look at the Diesel Futures (RBOB), we can clearly see that the prices were disturbed for diesel.

In a scenario of where the logistic costs would follow the futures, we can assume that logistics costs would jump roughly by 30% which would bring us to an average of around 0.80 to 1.05 per gram. 

This means that EBITDA MARGIN would go down to about 10%.

Is this the end of the world? No. I think it will definitely impact companies in the short term, but not as much in the long term. The only companies that might struggle are those that are highly leveraged. Given the nature of the industry, where significant debt is common and interest rates are high, this could potentially be the final nail in the coffin for some.