High Capex, High Rewards: Analyst Looks At Cannabis MSOs' Strategies

As interest rates climb and regulatory uncertainties loom, decisions on capital expenditures (capex) by cannabis MSOs (Multi-State Operators) become paramount for their future success. Are some MSOs missing out on significant growth opportunities?

In his latest analysis, Pablo Zuanic, managing partner and senior analyst at Zuanic & Associates, delves into the world of capital expenditure (capex) in the context of 20 prominent MSOs.

Charting the Growth Path: A Closer Look at Capex Strategies and Their Impact

Zuanic highlights that, amid high interest rates and regulatory uncertainties, most companies are prioritizing cost reduction and cash flow management, but suggests that some MSOs with the resources should seize the opportunity to increase capex for profitable growth.

"Given the macro context, high interest rates, and regulatory uncertainty, it makes sense that most companies are more focused on cutting costs and managing cash flow. On the other hand, this is precisely the time for some MSOs to take advantage (if they have the resources to do so), and ramp capex in the pursuit of profitable growth," Zuanic wrote.

High Capex to Sales

• Green Thumb GTBIF Leads the Way: Green Thumb, with a capex-to-sales ratio of 26% in 1H23, stands out as the leader in this category, well above the group average of 6%.
• Other High Capex Players: MariMed MRMD at 12%, 4Front FFNTF at 11%, and Cresco CRLBF at 10% are the other companies in the double digits. MariMed is notably on a capex ramp, heading north of 27% for 2H23 based on sales and capex guidance.
• Growth Trends: Green Thumb and MariMed have shown a clear upward trend in their capex-to-sales ratios, from 21% and 9% in CY21 to 26% and 16% in 1H23, respectively.

Low Capex to Sales and Average Performers

• Below Average: Several companies had capex-to-sales ratios below the group average of 6% in 1H23, including Tilt TILT at 0%, StateHouse STOH at 0%, and Ascend ACNNF at 2%, among others.
• Mid-Tier: Trulieve TCNNF at 4%, Jushi JUSHF at 5%, and Schwazze SHWZ at 6% are among the mid-tier performers with capex-to-sales ratios around the industry average.
• Consistency: Tilt, StateHouse, Schwazze, iAnthus, and Cresco have maintained relatively consistent capex-to-sales ratios, although some have seen a decrease in capex.

Capex Cycles Consistency

• Notable Performers: Companies like Tilt and StateHouse have been consistently operating with low capex-to-sales ratios.
• Steady Schwazze: Schwazze has maintained a 6% ratio in 1H23, in line with its 3-year average.
• The Case of Cresco: Cresco has been consistent at 10% for 1H23, although capex has decreased over time.

Balancing Act: Capex and Balance Sheets

• Strong Balance Sheets: Companies with high capex-to-sales ratios tend to have stronger balance sheets, such as 4Front FFNTF, StateHouse STOH, Acreage ACRGF, and Ascend ACNNF.
• Surprising Trends: Green Thumb GTBIF and MariMed MRMD, despite their high capex, boast strong balance sheets, while Cresco CRLBF and 4Front FFNTF, which are more leveraged, have also invested significantly.

Accretive Growth vs. Non-Accretive Growth

• Positive Growth Trends: Jushi JUSHF at (+30%), Schwazze SHWZ at (+23%), and MariMed MRMD at (+15%) have recorded positive sales growth per diluted share from 2Q21 to 2Q23.
• Lagging Performers: Companies like AYR AYRWF, Columbia Care CCHWF, Cresco CRLBF, iAnthus ITHUF, Planet 13 PLNHF, StateHouse STOH, Tilt TILT, Trulieve TCNNF, and Vext VEXTF have shown negative sales growth.
• EBITDA Performance: Most MSOs have seen negative EBITDA per share growth, with exceptions like Jushi JUSHF, Schwazze SHWZ, TerrAscend TRSSF, Green Thumb GTBIF, and Acreage ACRGF.

Photo by Michał Parzuchowski on Unsplash.