Cannabis 2.0 has become a major buzz word for the cannabis industry and this is an opportunity that we are excited about. The term refers to how the Canadian cannabis market is changing with the legalization of cannabis derivative products.
This represents a massive opportunity for cannabis producers and brands in Canada and we have been highly focused on this vertical. During the last year, we have seen a substantial increase in the number of companies that are levered to this market and this is something that investors need to be aware of.
The cannabis beverage market is a major sub-sector of the cannabis derivative product market. We expect to see strong consumer demand for products that fall under this category and want to highlight three companies that have been laser focused on this burgeoning opportunity.
BevCanna: A Cannabis Beverage Business to be Watching
BevCanna Enterprises Inc. (CSE:BEV, Q:BVNNF, FSE:7BC) has been highly focused on the cannabis beverage market and represents a multi-faceted growth opportunity. The company is levered to some of the most exciting verticals of the cannabis industry and has several significant potential catalysts for growth.
When analyzing BevCanna, one of the most attractive aspects of the story is related to the strength of the management team. The company is led by a team that has a proven track record of success when it comes to the beverage market and we are impressed with how the story has evolved so far this year. Heading into 2020, BevCanna is well positioned for growth and this is an opportunity that we are excited about.
BevCanna focuses on developing and manufacturing cannabinoid-infused beverages and consumer products for in-house brands and for white label clients. The company has a 100-acre outdoor cultivation site with the rights to a spring water aquifer and a facility with a bottling capacity of up to 72 million bottles. We are favorable on the number of avenues that BevCanna has for growth and believe that the market underappreciates the growth prospects associated with the entire operation.
A few months ago, BevCanna entered into a non-binding letter of intent to partner with Capna Intellectual to bring its leading multi-state cannabis vape brand, Bloom, to Canada. Under the agreement, BevCanna will manufacture and sell Bloom branded products in Canada and will acquire exclusive licensing and manufacturing rights to select Bloom product formats, technology and branding assets.
This development was reported less than a month after BevCanna signed a definitive agreement with Higharchy Ventures to develop, manufacture and launch a portfolio of cannabis beverage brands in Canada through Higharchy’s growing retail cannabis network. Under the agreement, BevCanna will manufacture Higharchy’s beverage-related brands including both in-house and established brands to which Higharchy has or will acquire the Canadian rights. In turn, BevCanna will be a preferred supplier through Higharchy’s cannabis retail holdings where regulations permit.
These agreements represent substantial developments for BevCanna and we believe that this is just the start of something significant. By forming relationships with leading cannabis brands, the company will be at the forefront of Cannabis 2.0 in Canada and we expect this to be a major catalyst for the business.
At current levels, we find BevCanna to represent a compelling play on the cannabis 2.0 opportunity and find the risk-reward profile to be attractive. Once the operations are running at fully capacity, we expect to see the market take another look at BevCanna and would not be surprised if we saw a re-rating by the street. Going forward, the company should record strong growth, and this is an opportunity that is on our radar.
HEXO Drops the Ball on the Cannabis Beverage Opportunity
Prior to 2019, many analysts were favorable on HEXO (HEXO.TO) (HEXO) and considered it to be one of the best positioned Canadian LPs related to the cannabis beverage market. The main reason for this assumption was due to its relationship with Molson Coors, one of the largest beer companies in the world.
Although this relationship seemed promising, there was not a capital component connected to the partnership (unlike Canopy Growth) and this left us cautious from the start. HEXO seems to have dropped the ball on the cannabis beverage opportunity (as well as many other projects) and the market has not responded well.
Molson Coors is one of the largest names in the alcohol industry and broker-dealers had high assumptions as it related to the cannabis beverage opportunity. Following the formation of the agreement, the Canadian cannabis producer went silent and this led us to believe that the relationship failed to advance.
When looking at HEXO, we see a company that has a massive production footprint and unrealistic expectations. Although HEXO tried to make a splash in Canada by substantially lowering the price of its cannabis, the strategy failed to live up to expectations. We will monitor this trend in 2020 and beyond.
So far this year, HEXO has been one of the biggest underperformers in the cannabis sector and market sentiment remains negative on the operation. Going forward, we believe that the business faces substantial headwinds and will monitor how the management team is able to weather the story.