Here's What You Learn About The Cannabis Sector After Meeting With 15 Key Players

Friday marks the last day of MJBizCon, one of the largest business conferences in the cannabis world.

After meeting with 15 influential actors in the space, cannabis analyst Pablo Zuanic from Cantor Fitzgerald wrote a review of the sector based on findings from those conversations.

“We remain positive on the sector, albeit prefer the more established and larger operators in the US. In Canada, we are starting to put greater importance on low-cost structures and sustainable business models,” Zuanic wrote.

Good Vibes From The U.S.: The U.S. cannabis industry is on pace to surpass $23 billion in legal sales this year, including the medical and recreational markets. This is a 40% year-over-year increase.

Based on current states that have legalized, that number could reach $45 billion by 2025 but could rise even more according to estimates from the Colorado market.

The Mountain State, having legalized eight years ago continues to grow, with recreational sales up ear-over-year by 11%.

“If we took the current CO per capita spend of $400, the US total market would be $132Bn. But this last number would likely be higher, as it does not factor future on-premise consumption,” Zuanic said.

Check out Benzinga's live stream from the MJBizCon floor, day 1 (article continues below)

Delaying Federal Legalization Benefits MSOs: “Smaller operators do not have access to capital, and if they do, it is on pricey terms. On the other hand, the credit markets are opening up for the MSOs,” noted Zuanic.

Also, more institutional investors are approaching the MSOs to take equity stakes. Most markets at the state level remain quite restrictive/protected, which makes for rather favorable economics. 

For these reasons, it is no surprise that MSOs are outgrowing the industry both in organic terms and via M&A.

The Word On The Street About Federal Reform: “Most MSOs believe interstate trade is a distant ‘challenge/opportunity,’ and that when and if it happens, it may not all come at once: some states may opt out, and some states may form regional alliances.”

Regarding uplisting to NYSE/NASDAQ, there is a growing belief that if Congress shows momentum, the major exchanges will wait, but if Congress gets stuck, the US exchanges are seen as moving forward in creative ways.

“If so, valuation multiples for MSOs would move up, in our opinion,” Zuanic said.

Canadian LPs could close US transactions, even though they would not yet be able to operate at scale if there is no interstate trade.

A Boost To M&A Action With Slower Overall Growth: Given the 40-50% drop in MSO shares since peaking in February, private sellers might not be willing to compromise at lower prices.

Check out Benzinga's live stream from the MJBizCon floor, day 2 (article continues below)

“That said, we understand smaller operators see the writing on the wall, and many of these companies are being shopped to the larger MSOs. The question for the MSOs is whether they buy brands, capabilities, cultivation, retail stores, and balance entering new markets or adding depth in their key markets,” the analyst said.

While the markets remain vibrant, most operators have seen a “slowdown” compared with the industry’s growth pace in 1H21. This could actually be a “normalization” after stimulus checks from the first half of the year and many consumers still being home from COVID. 

“Now, the combination of inflation (and supply chain issues) impacting disposable income, and changes in share of wallet spend (as more people travel and dine-out, and return to their workplaces), are all having an effect on sales. Those operators with significant presence in several states see the slowdown," according to Zuanic.

What Is Up In Canada? “The Canadian rec market is now at about a US$3 billion annual run rate, but with retail prices that we estimate are about a third below US averages.”

With several companies likely unable to sustain these lower prices, given their cost structure and production inefficiencies, the analyst expects the lowest cost producers to gain share.

“If US exchanges uplist MSOs, some of the Canadian LPs will be able to take ownership of US assets, but they will not be able to produce at scale if there is no interstate trade. But regardless, given their liquidity and higher valuation, we think they would benefit from buying US THC assets with better economics than those they own in Canada.”

Export markets: Markets abroad are developing in a more pharmaceutical way than the wellness trends we see in the US, says the Cantor report.

“This means more education/training of doctors to prescribe cannabis (not just using THC as a last resort) and work with pharmacies staff (that not only sell cannabis, like staff at a dispensary).”

Lead image by Ilona Szentivanyi. Copyright: Benzinga.