With United States cannabis multi-state operators (MSOs) set to hand down their latest financial results starting next week, analysts at Canaccord Genuity (TSX:CF, LSE:CF) expect to see modest sector-wide growth as these companies remained focused on driving profitability during the quarter.
In a note to clients, the analysts wrote that they believe 2Q/fiscal 3Q earnings will come in incrementally higher on a sequential basis but somewhat muted given that most operators are still in the midst of a variety of operational rightsizing initiatives, with profitability prioritized ahead of growth amid macro-level headwinds.
They noted that, per their review of state-level sales data in the United States, retail sales across legal markets were up 3% on average when compared to the previous quarter, being the first three months of 2023.
“Although encouraging, we believe more mature and scaled MSOs will slightly underperform this growth profile as operators continue to focus on profitability while pushing more products through vertically integrated sales channels,” they wrote.
“As a result, we expect most MSOs to experience continued declines in wholesale contribution to third party dispensaries for the time being.”
Cannabis MSOs appear on track to achieve their free cash flow targets, according to Canaccord.
“Although sector growth has been muted for a while, we are nonetheless encouraged to see that in addition to sector leaders calling for free cash flow in the tens of millions for 2023, many of the smaller, less-scaled MSOs have now reached, or are close to reaching, operational profitability."
Further, they expect the trend of MSOs looking to exit or significantly roll back their exposure to markets where profitability is challenged by market saturation and illicit competition will be highlighted in 2Q/3Q reporting.
Investors continue to prioritize overall balance sheet health over interim operational performance given the increasing cost of debt paired with a number of sizeable maturities in the space over the next 24 months, according to the analysts.
“Although 2023 has seen several operators announce successful refinancings, we believe the ability to ‘weather the storm’ and efficient balance sheet management is currently the most significant differentiator for MSO relative performance,” they wrote.
Maryland launch a tailwind
The launch of adult-use sales on July 1, 2023, will be a moderate tailwind for the second half of 2023, according to the analysts, who believe MSOs with existing medical exposure in the state are set up for an "attractive growth driver" through the rest of the year.
“Within the first week of market launch, the state generated about US$20.5 million in combined medical and adult-use sales, implying about US$82 million in monthly sales out of the gate.
“We believe the robust infrastructure within MD’s adult-use program will eventually support our estimated mature total addressable market of greater than US$1.5 billion in annualized sales.”
Headlines continue to drive price action
The analysts highlighted that price action for cannabis MSOs will remain driven by headlines out of Washington DC, as has been the case for the better part of two years.
“With material (albeit not sustained) upward movement towards the end of 2022, this year has seen a number of positive (yet also fleeting) federal headlines around the prospects of SAFE Banking passing a Senate vote,” they wrote.
“Although we believe SAFE making any meaningful progress in the near-term remains doubtful, sector valuations still remain greater than 10% above its 2023 lows.”
On valuation, the analysts noted that the average MSO trades about 4.8 times their estimated 2023 enterprise value (EV)/earnings before interest, taxes, depreciation and amortization (EBITDA).
This is 60% lower than the sector highs of 2021 and more than 50% below the multiples of more traditional consumer packaged goods companies, according to analysts.
“Until the sector attracts more institutional capital (which will likely require a change at the federal level), we believe valuations may still be susceptible to downward pressure,” they wrote.
“However, we also believe that MSOs have attractive risk/reward prospects given that company fundamentals and regulatory progression are trending in the right direction (even if slowed for the time being).”
Cannabis MSO earnings to watch
Among cannabis MSOs set to report their latest financial results next week is Jushi Holdings Inc (CSE:JUSH, OTCQX:JUSHF) which will hand down its 2Q results before the market open on August 11.
The analysts expect to see the company post 3% quarter-over-quarter growth reaching $72 million, primarily driven by continuous operational improvements and increased efficiencies at its grower-processors, as well as efficiencies at its retail dispensaries.
“We see several drivers of profitability improvement throughout the balance of 2023, including continuing benefits from workforce transformation within JUSH’s retail store network and greater utilization rates within grower processor assets flowing through the model late 2Q and into 3Q onward,” they wrote.
Planet 13 Holdings Inc (CSE:PLTH, OTCQX:PLNHF), which intends to report after the market close on August 9, is expected to post flat quarter-over-quarter revenue of $25 million for 2Q.
“Traditionally, 2Q and 3Q are stronger quarters seasonally, but this may be partially offset by the continuous impact on consumer wallets due to inflationary pressures,” the analysts noted.
“The company continues to target gross margin of 50% or higher for its retail operations and expects gains from vertical integration to offset some pricing pressures at retail.”
For Trulieve Cannabis Corp. (CSE:TRUL), reporting on August 9, the analysts expect the company to post revenue of $283 million, above the consensus expectation of $281 million but 2.3% lower than 1Q’s $289 million.
“Our state-wide data suggests that cannabis price compression is producing meaningful headwinds for otherwise robust volume growth relative to Q2/22,” they noted. “We expect price compression to be transitory as Q2 tends to be seasonally weak and highly promotional due to 420 sales.”
General macro trends and the closing of its Deseret Wellness acquisition support incremental growth in 2Q for Curaleaf Hldgs Inc. (CSE:CURA, OTCQX:CURLF) when the company reports after the closing bell on August 9, the analysts wrote.
“We expect CURA will achieve Q2/23 revenues of about US$342 million, which would represent a quarter-over-quarter increase of about 1.6%.” they wrote.
The analysts expect TerrAscend Corp. (CSE:TER, OTCQX:TRSSF) to have focused on its up-listing to the Toronto Stock Exchange and retail expansion in Maryland while also progressing balance sheet right-sizing during 2Q.
“We are forecasting TSND to report 2Q/23 revenues of US$70.6 million, which would represent a quarter-over-quarter increase of about 1.7%,” the analysts forecast ahead of the company’s results, due on August 10 after the market close.
Contact the author at emily.jarvie@proactiveinvestors.com
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