Canaccord Genuity (TSX:CF, LSE:CF) is expecting a relatively flat performance from US cannabis multi-state operators (MSOs) in 3Q 2022 as federal catalysts begin to stir.
In a note to clients, analysts outlined their expectations from MSOs including Jushi Holdings Inc (CSE:JUSH, OTCQX:JUSHF) and Planet 13 Holdings Inc (CSE:PLTH, OTCQX:PLNHF), forecasting that 3Q would represent a largely flat period when compared to 2Q on both the topline and adjusted earnings before interest, taxes, depreciation, and amortization (EBIDTA).
“As was a key theme in Q2, we believe inflationary pressures on consumer spending will continue to weigh on growth as the cost of food, transportation and other non-discretionary staples rise and demand a higher proportion of wallet share from consumers,” the analysts wrote.
READ: Stifel analysts argue underperformance of the cannabis sector in 2022 is well founded
But they noted that New Jersey’s recently-introduced recreational cannabis program on April 21 should help mitigate growth headwinds.
“Based on our review of sample branded sales data, we estimate that NJ cannabis sales increased by about 37% quarter-over-quarter to US$190M in 3Q/22,” they wrote.
Near-term valuation catalysts 'still on the table'
Further, the analysts wrote that MSO valuations were particularly sensitive to the prospect of legislation progressing at the federal level. They noted that although there have been several positive headlines over the past year the likelihood of cannabis becoming legalized or de-scheduled in the near future remains remote.
“However, with Joe Biden’s recent announcement to pardon federal convictions for simple possession and to review the appropriateness of having cannabis classified as a Schedule 1 narcotic and the prospect of a Safe Banking ‘Plus’ Act to potentially gain traction during the anticipated November to January ‘lame-duck’ session, we believe near-term valuation catalysts are still on the table amid a slower fundamental environment,” the analysts wrote.
On valuation, the analysts wrote that the average MSO trades at about 5.2x their estimated 2023 EV/EBITDA, which is more than 60% lower than the sector highs of early 2021 and more than 50% below the multiples of more traditional consumer packaged goods companies.
Until the sector attracts more institutional capital, which will require a change at the federal level, the analysts wrote that they believe valuations may still be susceptible to downward pressure.
“However, we also believe that MSOs have attractive risk/reward prospects given that company fundamentals and regulatory progression are all trending in the right direction (even if slowed) with the prospect of a meaningful sector re-rating should banking reform actually get passed in the upcoming lame-duck Congressional session,” the analysts concluded.
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