Cantor Fitzgerald analyst Pablo Zuanic issued a report this morning wherein he sees some worth within the beaten-up hashish group, though he additionally cautioned that quite a few roadblocks stay. He was clear that the group might not have even discovered a backside but as costs proceed to slip together with the broader market. Zuanic additionally famous that even the second quarter won’t deliver aid on valuations, however he’s a selective purchaser at these ranges. Having stated that he stated buyers might not see any significant upside for an additional two to a few years and that it might most likely solely happen when some type of federal reform happens.
Present Valuation
Zuanic wrote, “The MSOS ETF fell 25% within the final month vs. a 7% drop for the S&P500, and over the past three months it’s down 49% vs. -15% for the SPX Index (yoy -75% vs. -12%). Even on risk-on days, when the bigger Canadian LPs transfer up, MSOs both drop or keep flat. The MSO inventory efficiency masks encouraging medium and long-term gross sales developments, with extra states legalizing since 4/1 (NM, NJ), or quickly to begin rec gross sales (RI, CT/NY), or quickly to vote to legalize (MD, MO); additionally, states like IL may see development speed up as extra shops open, as now we have not too long ago seen in MI (+22% seq gross sales developments based mostly on Apri/Might information).”
If buyers had been hoping for some aid within the second quarter, then Zuanic dashed these hopes. He stated that the second quarter increase will most certainly solely apply to these corporations in New Jersey. Grownup-use gross sales start within the state on April 21 and gross sales have reportedly been excellent. Plus, buyers have been more and more centered on revenue margins and money flows, which dampens shopping for. The businesses with good money circulation are additionally beset with excessive taxes and debt ranges are excessive.
“On this context, the place it’s troublesome to name the underside (as technicals and poor liquidity exacerbate inventory swings and issues concerning the lack of reform on the federal degree and about state degree fundamentals), we might tread rigorously and are patrons solely selectively of some MSOs. We expect the present state of affairs will result in additional consolidation (Columbia Care was at 0.9x debt to gross sales as 3/31/22, and we expect that contributed to the choice to promote on the backside) and profit these in a stronger place,” wrote Zuanic. He says he’s centered on high quality and his high picks (in alphabetical order) stay: Cresco (CRLBF. OW) proforma (1.7x C23 EV/Gross sales), Curaleaf (CURLF, OW) (2.7x), Inexperienced Thumb (GTBIF, OW) (1.6x), and Trulieve (TCNNF, OW) (1.9x).
Gross sales Traits
The analyst took a temperature learn on gross sales within the second quarter based mostly on information from Headset. He cautioned that it wasn’t official laborious information, however did collect that second-quarter gross sales general had improved from the primary quarter. Most corporations had reported that first-quarter gross sales dropped from the fourth quarter, so this enchancment is welcome. Nevertheless, early indications appear to say that gross sales dropped versus 2021 for a similar time interval. He believes these gross sales figures are competing with final yr’s stimulus checks that customers received in the course of the pandemic.
Hashish costs appear to be falling as a lot because the inventory costs. The analyst cited Hashish Benchmarks and identified that wholesale costs nationwide (within the 18 states it tracks) averaged $1,057/lb for the week ending 7/1, down 16% from 4/1/22 and down 20% YTD (-35% you). “Relating to key MSO states that we monitor: AZ -9% seq and -45% YTD; CA -4% and -20%; CO -9% and -17%; CT -10% and -9%; IL +1% and -12%; MA -7% and -37%; MI +4% and -43%; NV -5% and -14%. We understand decrease wholesale costs typically could also be impartial for corporations simply centered on retail, however many of the MSOs that we monitor have cultivation and are usually vertically built-in,” he wrote.
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