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Home / Business

Comment: The risks of investing in Kiwi cannabis

NZ Herald
19 Jul, 2019 05:47 AM4 mins to read
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There's no shortage of choice when it comes to the cannabis industry. Photo / Getty Images

There's no shortage of choice when it comes to the cannabis industry. Photo / Getty Images

When it comes to cannabis, we're a divided nation. With passing of legislation paving way for the plant's medicinal use, and a referendum for personal use on the horizon in 2020, political positioning is in full swing - and early investors are starting to make their first bets.

Emerging industries with the potential scale of the cannabis market provide significant opportunities for early investors, however, the chance to be at the forefront of a growing market comes with substantial risks.

Polling data over the last year suggests the public is split on legalising cannabis for recreational use. Initial polls hinted at a majority in favour, however, more recent polls suggest the majority will now vote against legalising cannabis for recreational use at the 2020 referendum. While legislation for medicinal cannabis is progressing, significant uncertainty remains on the recreational front. This is an important distinction to keep in mind when considering any financial investment in the emerging cannabis market.

Recent developments have seen a number of medicinal cannabis and therapeutics companies founded within the last few years, all looking to capitalise on the emerging industry. Founded in 2015, Hikurangi Group was one of the first companies in New Zealand to get underway. In 2017, a number of other companies entered, including Helius Therapeutics, Cannasouth, Nubu Pharmaceuticals and Setek.

More recently, there's been increasing interest from offshore players wanting to establish local partnerships or set up subsidiaries to compete directly. With tangible experience in markets where cannabis use is already legal, many international players have a head start on the local market.

While the industry expands worldwide, publicly listed share prices continue to experience volatility similar to cryptocurrency. Many international players in the cannabis industry have seen their stock prices tumble; in some cases, plummeting to near zero. And as recent news coverage would suggest, New Zealand companies are no exception.

Hamilton-based biopharmaceutical company, Cannasouth, was New Zealand's first medicinal cannabis IPO, providing local investors the opportunity to purchase shares in the company. Opening in late-May, the IPO raised NZ$10mil at 50 cents a share. In mid-June, it listed on the NZX where it was first traded at 51 cents - but within that same day dropped roughly 20 per cent, leaving it at 40 cents. Currently, the share price sits even lower at 38 cents.

There are still many uncertainties associated with the industry. Photo / Getty Images
There are still many uncertainties associated with the industry. Photo / Getty Images

Like any fledgling market, there's an element of hope within the uncertainty, and some investors may see potential to reap substantial benefits from this asset class. However, high return is typically mirrored with high risk. This industry is only beginning to find its feet in New Zealand, so investors should proceed with caution.

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As with any investment, cut through the hype and do your own independent research. Start by considering which part of the market you are sizing up – medicinal, recreational, or both. While offshore trends suggest recreational legalisation follows medicinal legislation, the two distinct segments of the cannabis industry have vastly different success factors.

Once you've identified the market, ensure you have a solid understanding of relevant regulations. Proposed regulations for medicinal use of cannabis have only recently been released by the Ministry of Health for consultation, so factor the risk associated with the unknown into any investment decision.

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Timing is also an important factor for any investment, and patience often pays. There will be ample opportunity to gain exposure to the emerging cannabis industry, so don't get caught by the fear of missing out.

If you decide the time is right to get some exposure to the industry, ensure you understand which part of the supply chain you're investing in. International prices for raw product continue to decline with additional supply coming online, and many growers internationally are feeling the squeeze. Understanding where each company sits in the supply chain is important to get a sense of the competitive dynamics, and the likely implications on profit margins.

Growers of raw product only (cannabis flowers) are likely to find themselves in a situation where they're a price taker in a commoditised market with lower profit margins. Conversely, producers of end-consumer products that have strong intellectual property and brand association may have the ability to command higher profit margins.

While no one can accurately predict how the development of the local market will play out, monitoring trends overseas in more developed markets can provide useful insights. Understanding the risks involved and conducting your own research will ensure you have the best chance of succeeding with an investment in the cannabis industry.

With many legal changes afoot, there will be plenty of action to watch unfold as New Zealand's cannabis industry develops.

- Simeon Burnett is the chief executive and co-founder of Snowball Effect.

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