Cannabis Chart Of The Week: What Should MSO EBITDA Multiples Be?

Viridian created a discounted cash flow model ("DCF") to calculate a range of theoretically supportable EV/EBITDA multiples, given analysts' expectations for 2024-2025 and reasonable assumptions for the seven years after that.

We based our model on a hypothetical $1 of EBITDA and generated a DCF valuation of that $1 to produce an EBITDA multiple.

Assumptions:

1. Revenue growth rates for 2024-2025 are consensus analyst estimates for the twelve largest MSOs.

2. EBITDA Margins 2024-2025 are consensus analyst estimates. 2025 & 2026 margins are held constant at 28%, and afterward, margins advance or decline towards an assumed terminal margin, sensitized in the table. We believe it is appropriate to forecast decreasing EBITDA margins for post-legalization.

3. Tax rates on EBITDA are assumed to be 50% for 2024. Then they are assumed to decline to 8% from 2025 onward based on combined federal and state tax rates of 27% on a company with assumed EBITDA margins of 28%, 3x Debt/EBITDA, and average depreciation/sales for the group of .1x sales.

4. Required Reinvestment is driven by an assumed Sales/Capital ratio of 1.0x. This ratio is better than the .6x we measured in our recent study of capital intensity in the industry. We justify the lower marginal capital intensity based on near-term sales increases from new rec states where significant capital spending has already occurred.

5. The range of equity discount rates considered is 15-19.0%, which we believe is reasonable given the increases that have occurred in the risk-free rate and balance sheet leverage for the group. Note that we have assumed that equity discount rates decline by approximately 250bp over time as capital costs become lower for the industry. This assumption is likely to be overly conservative, and we could easily see more significant capital cost declines.

The resulting EBITDA multiples are shown in the Sensitivity Analysis Chart. Multiples range from 11.2x to 16.75x; however, we believe the most likely range to be between 13.25x and 15.8x. The group is currently valued at 7.8x consensus NTM EBITDA. 

The result confirms that the MSOs are cheap relative to their conservatively estimated intrinsic values; however, the ingrained investor skepticism regarding all cannabis regulatory developments and the absence of new capital in the market have delayed the upside move we still expect to develop.

Other catalysts, like positive state actions in Florida and potentially Pennsylvania, a new Garland memo, the resurrection of the SAFER act, or encouraging developments in the Boies lawsuit, could meaningfully accelerate these gains. We believe a doubling of prices is a reasonable expectation as these catalysts unfold. 

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.