Illinois could be a cannabis powerhouse: Stifel GMP

Cantech Letter [April 6, 2020]

It’s been a promising start to the newly opened up rec cannabis market in the state of Illinois, according to sector analyst Robert Fagan of Stifel GMP who delivered an update to clients on Friday, saying COVID-19 appears to have had no major impact on market growth in the state for 2020.

This past January, Illinois became the 11th state in the union to legalize recreational marijuana after having opened up its medical market in 2013.

And sales are growing, attested to by new data from the Illinois Department of Financial and Professional
Regulation which said that Illinois dispensaries sold about $36 million in legal cannabis in the month of March, up from $35 million in February — and that’s in the middle of the COVID-19 pandemic which prompted state authorities to ask residents to stay at home and shut down many Illinois’ businesses. (All figures in US dollars.)

The first quarter 2020 recreational market sales ended up at $110 million, which puts Illinois slightly behind Massachusetts in rec sales at about $500 million annualized, said Fagan, who contends that supply issues in Illinois will hamper growth to some extent until they get resolved.

“We believe [Illinois being slightly behind Massachusetts] is mainly due to MA REC stores’ higher productivity at that point, with sales/store ~2x higher than that of IL REC stores thus far. However, MA’s REC market had been operating for roughly eight months, providing substantial lead time for producers to ramp up capacity. Hence, we believe IL's REC stores could have large productivity upside, once constrained supply conditions are alleviated beginning in H2/20,” Fagan said.

Overall, the analyst is viewing the new data as a positive for the industry in the state. Fagan estimated that licensing in Illinois looks to be on track for potentially doubling store penetration by next month.

“We are encouraged by IL’s REC market development tracking to expectations, with COVID not presenting a material impact to our forecasts as most regulators deem cannabis essential. We also view IL’s solid visitor sales as reaffirming the non-discretionary nature of cannabis demand, which we expect to sustain good industry growth for 2020 despite economic headwinds,” Fagan said.

Fagan said the out-of-state traffic suggests that customers are not being significantly deterred by risks surrounding COVID-19 to avoid travelling to Illinois for product, itself indicating that post-COVID-19, strong visitor traffic is likely to be sustained.

As for the analyst’s take on the US cannabis space in general, Fagan said sales should grow by a CAGR of about 30 per cent over the next four years to reach about $24 billion.

The fragmented industry, where cannabis remains a Schedule 1 prohibited substance at the federal level, makes for a competitive supply environment, Fagan said, but one which also has great M&A opportunities for well-capitalized players.

“The US cannabis sector currently has ~35 states with legal access to either medical or recreational-use cannabis. Similar to Canada, the US cannabis sector allows investors to leverage the strong, secular growth trends which are characteristic of the legalization of cannabis, except in end-markets which are ~5x–10x larger,” Fagan wrote.

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