OUR 9TH YEAR OF PROVIDING PROPRIETARY CAPITAL MARKETS INTELLIGENCE ON THE CANNABIS / HEMP / PSYCHEDELIC SECTORS
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Chart of the Week
Chart of the Week
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from that week’s Deal Tracker that we believe are impactful for investors, companies and acquirers.
Week ended 01/06/2023
Low Valuation Multiples and Leverage Are a Winning Combination
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- It is no secret that 2022 was unkind to cannabis. Many of the tier one and two MSOs are trading at multi-year lows.
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- The environment is unlikely to improve anytime soon, and investors must have a long-term horizon.
- Neither SAFE, Rescheduling/Descheduling, or any 280e relief is likely in 2023.
- Commoditization-based wholesale price declines will continue. The honeymoon period between the opening of a new rec market and the onset of excess supply is shrinking.
- Inflationary cost increases will continue to pressure margins.
- New investors will slowly creep into the market, but capital will remain tight.
- A record number of U.S. cannabis companies are likely to fail in 2023.
- The environment is unlikely to improve anytime soon, and investors must have a long-term horizon.
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- Against this backdrop, Investors should err on the side of caution. There is a massive upside in nearly all of these names; however, they are not equally attractive.
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- The chart ranks the MSOs from most attractive to least attractive based on a combination of low consensus EV/ 2023 EBITDA multiples (red line) and low consensus Net Debt/ 2023 EBITDA ratios (black) line.
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- We ranked each company on the valuation and leverage measures and averaged their ranks to create an indicator of Less Expensive / Less Risk shown by the green bar. Companies are arranged from most attractive on the left to least attractive on the right.
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- Based on this methodology, MariMed (MRMD: CSE) ranks as the most attractive investment because it has the 4th lowest EV/EBITDA and the 2nd lowest Net Debt/ EBITDA. Green Thumb (GTII: CSE) ranks 5th. It has a relatively high 6.2x valuation but compensates for this with net leverage of only .3x EBITDA. AYR (AYR.A: CSE), ranked 7th, is particularly interesting. It has the lowest valuation multiple of the group but the second-highest leverage. Investors are being paid fairly for taking higher credit risk.
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- TerrAscend (TER: CSE) and Jushi (JUSHF: OTC) appear the least attractive. Each of these companies suffers from a high valuation multiple and high leverage. Both have taken appropriate steps to assure liquidity, and we see no imminent issues ahead; however, we think better opportunities are available.
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- Investors should look for companies with reasonable leverage and attractive valuations.
