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March 28, 2024

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CIBC’s (CM.T) cannabis coverage: is this Canadian bank a hot mess?

The Canadian Imperial Bank of Commerce CIBC (CM.T) – a $48 billion company with 11 million clients and 40,000 employees – just released a statement declaring that other cannabis industry analysts are lying or deluded about how much weed it is going to sell in the next two years.

“Sales estimates for the legal cannabis industry over the next two years are ‘far too aggressive’ and could lead to significant stock declines, according to CIBC analysts,” reported Bloomberg News on September 24, 2019.

“CIBC published a note to clients on Tuesday stating that consensus estimates for revenue and adjusted earnings from other cannabis analysts are ‘unachievable’,”, continued Bloomberg.

Bloomberg provided a free bonus insight for any investor who might’ve just snapped out of a coma: “Cannabis companies have seen a significant decline in stock valuations over the past year.”

CIBC predicts that cannabis producers will sell about $2.2 billion worth of weed in 2020, rising to $3.3 billion in 2021.

The “consensus revenue estimates” are much higher at $6.5 billion for 2020 and $7.5 billion in 2021.

CIBC admitted that “consensus estimates include international revenues, whereas our estimates do not.”

That’s like saying, “Although other people think you are 6’ 2”, we estimate your height at 5’ 3” – although our policy is to stop measuring at the nipples.

My volatile ginger-haired son has a charismatic girlfriend he regularly falls in-and-out of love with.

So it is with CIBC and the marijuana business.

On June 1, 2018 CIBC helped underwrite a $60-million private placement for Canopy Rivers (RIV.T) an investment-arm subsidiary of Canopy Growth (WEED.T).

“It’s the first time CIBC investment bankers have been directly involved with cannabis financing,” stated The Financial Post, “The deal will make CIBC the second of the Big Five banks to help underwrite companies in the marijuana sector. “

At the end of its first day of trading, RIV was worth $1.6 billion.  It’s now worth $344 million.

On January 2, 2019 CIBC, along with the Bank of Montreal (BMO.T) decided to lend $80-million to cannabis company PharmHouse – a J.V part-owned by Canopy Rivers.

“The bank loan is one of the largest provided to a private company in the cannabis industry by top-tier banks,” stated The Financial Post.

The $80 million was used to fund PharmHouse’s 1.3-million-square-foot, all-glass greenhouse facility in Leamington, Ontario, expected to produce “a significant amount of cannabis within the Canopy Rivers ecosystem.”

On May 9, 2019 RIV announced that PharmHouse will provide Canopy Growth with a minimum of 25,000 kg of cannabis per year and a maximum of 45,000 kg.

Announcing an off-take agreement before you have a license to grow, is like booking a honeymoon before your 1st date.

You get an “A” for optimism and a “F” for reality-based thinking.

Two months later, CIBC breathed a sigh of relief when PharmHouse received approval from Health Canada to grow cannabis, starting with 190,000 sq. ft. with plans to ramp to max-capacity 1.3 million sq. ft.

CIBC released a 83-page report titled: “Cannabis: The Beginning Of A Global Seismic Shift”.

“Dozens of small/medium-sized firms will likely earn moderate revenues and earnings,” stated CIBC, “But our view is that only a handful will come to dominate the global market.”

Seriously CIBC?

You came up with this all on your own?

We entered the CIBC war room expecting to find informed opinion wrapped in a Gucci suit – instead we discover some dude with a neck-beard drooling into a Styrofoam cup.

Every mature retail sector on the planet features “medium sized firms that earn moderate revenues” and “a handful of dominant companies.”

In the same report, CIBC opined that “Canopy and Cronos (CRON.T) are likely to be two of those winners”, while warning that “Aphria is a manufacturing and automation expert” that may have problems with “capital allocation” and “corporate governance”.

CIBC gave Aphria a “Neutral Rating” with a $10 target (it’s now trading at $7.62).

CIBC initiated coverage of Canopy Growth with an “Outperformer Rating” and $65 price target.

CIBC also initiated coverage of Cronos Group, with an “Outperformer Rating” and $22 price target.

As the above charts demonstrate, CIBC’s price targets for WEED and CRON were accurate in the short term.

Long term – not so much.

“It wasn’t difficult for us to convince the big banks that we have something great going at PharmHouse,” stated brilliant orator Bruce Linton, then Chairman and CEO of Canopy Rivers, “We knew the guys from CIBC.”

“Mr. Linton can probably lay claim to the title of “most famous cannabis CEO”, and this does in fact matter,” stated CIBC in the report, “We consider his vision, execution skills, and ability to act as an ambassador for the industry to have considerable value.”

Since the CIBC report, Mr. Linton has been fired.

Cannabis companies “without strong enough balance sheets to get through what could be an elongated sales ramp, or without a differentiated strategy, could see operations halted,” stated CIBC in its banker-speak summary.

Translation: “if your company is broke and has no good products, it might fail.”

Good to know.

In Q3, 2019, CIBC earned $1.39 billion, compared to $1.37 billion in Q3, 2018.  Provisions for credit losses grew by $50 million (21%, year-over-year), signalling that management believes defaults will go up.

If you’d purchase CIBC stock in early 2008, you’d be close to break-even right now.

That may not sound like a big win.

But it’s much better than CIBC has done on its cannabis investments so far.

– Lukas Kane

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