For the U.S. cannabis industry in 2022, ROTH Capital Partners expects growth potential to remain static over the long term but for headwinds to occur in the short term, wrote analyst Scott Fortune in a Feb. 16 research note.
"Cannabis remains a long-term value creation opportunity," Fortune added. The potential of a mature U.S. cannabis market alone is about $100 billion.
Here are ROTH's 2022 Top Picks in cannabis, all rated Buy:
Charlotte's Web Holdings Inc. (CWBHF:OTCQX)
Verano Holdings Corp. (VRNO:CNSX; VRNOF:OTCMKTS)
Ayr Wellness Inc. (AYR.A:CSE; AYRWF:OTCQX)
Flora Growth Corp. (FLGC:NASDAQ)
ROTH expects U.S. cannabis companies to report "relatively muted" revenues for Q4/21 and Q1/22, wrote Fortune. This is because many are still working through inventory that built up after COVID-19 restrictions loosened and demand for cannabis products dropped. ROTH, however, expects revenues to improve starting around Q2/22.
Cannabis fundamentals in the U.S. are expected to stay strong this year, and as such, large multistate operators (MSOs) are expected to fare the best, Fortune purported. For these companies, consensus estimates sales growth of about 40% and EBITDA margins around 35%. The opening of new markets, such as New Jersey, will assist growth.
Smaller operators, on the other hand, particularly those not listed on major U.S. exchanges, will likely struggle, hindered by the continued uncertainty around federal legalization of cannabis in the States.
The good news for the industry is the federal government could address cannabis in around mid-2022, with an outcome favorable to the industry, according to ROTH. The passage of pro-cannabis legislation would be a significant sector catalyst. It would lead to uplistings, a subsequent increase in institutional ownership and premium MSO stock valuations, followed, at some point, by rerating.
"We believe it is a matter of when, not if, for institutional accounts to take positions, as evidenced by the higher large fund ownership of ancillary operators listed on U.S. exchanges," Fortune highlighted.
Until it becomes clear whether or not the U.S. will legalize cannabis, equities' multiples will remain compressed, Fortune indicated. Now, among the top MSOs, they are about 3.2 times 2022 sales and 9.1 times EBITDA. In comparison, tobacco and alcohol companies are trading at about 4.2 and 5.5 times 2022 sales, respectively.
"We see a material disconnect on the pricing side for cannabis," Fortune wrote.
ROTH also expects the debt markets to offer increasingly competitive rates to the larger MSOs as these companies' profits improve. In turn, these operators are expected to take advantage to refinance and/or acquire smaller operators in, and possibly out of, the U.S.
"We also view the increased receptiveness on the debt side as a leading indicator for future equity performance ahead of uplistings and believe debt capital will be the primary source of mergers and acquisitions-related growth in 2022," wrote Fortune.
As for the cannabis market outside of the U.S., Fortune wrote, the "medical and recreational regulatory movement is slowly picking up." Malta recently legalized cannabis, becoming the first European country to do so, and other countries are feeling pressured to follow suit. Canada began the year with oversupply and an overabundance of licensed producers.
Fortune noted that "material revenue recognition will come when these markets fully convert to adult-use sales." In the interim, ROTH recommends investors focus on the entrenched operators in existing medical markets, such as Germany and Israel, or on companies with additional ways to generate revenue.
Disclosures:
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Disclosures for ROTH Partners, Feb. 16, 2022
Within the last twelve months, ROTH Capital Partners, or an affiliate to ROTH Capital Partners, has received compensation for investment banking services from Agrify Corp., Flora Growth Corp., GrowGeneration Corp., High Tide Inc., IM Cannabis Corp. and iPower Inc..
ROTH makes a market in shares of Agrify Corp., Flora Growth Corp., Greenlane Holdings Inc., GrowGeneration Corp., High Tide Inc., Innovative Industrial Properties Inc, IM Cannabis Corp., iPower Inc., Tilray, Inc. and Village Farms International, Inc. and as such, buys and sells from customers on a principal basis.
Within the last twelve months, ROTH Capital Partners, or an affiliate to ROTH Capital Partners, has managed or co-managed a public offering for Agrify Corp., High Tide Inc., IM Cannabis Corp. and iPower Inc..
Shares of Ayr Wellness, Columbia Care, Inc. (CCHW.CN), Curaleaf Holdings, Inc. (CSE: CURA), CV Sciences, Inc., Charlotte's Web Holdings, Inc (CWEB.CN ), Flower One Holdings, Inc. (FONE.CN), Glass House Brands Inc., Green Thumb Industries, Inc. (GTII.CN), MediPharm Labs Corp. (OTC Pink: MEDIF), Trulieve Cannabis Corp. (CNSX: TRUL) and Verano Holdings Corp may not be eligible for sale in one or more states.
Shares of Columbia Care, Inc. (CCHW.CN), CV Sciences, Inc., Charlotte's Web Holdings, Inc (CWEB.CN ), Flora Growth Corp., Flower One Holdings, Inc. (FONE.CN), Greenlane Holdings Inc., IM Cannabis Corp., iPower Inc., MediPharm Labs Corp. (OTC Pink: MEDIF) and Village Farms International, Inc. may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities.
ROTH and/or its employees, officers, directors and owners own options, rights or warrants to purchase shares of Flora Growth Corp. stock.
Within the last twelve months, ROTH Canada, an affiliate of ROTH Capital Partners, has managed or co-managed a public offering for Flora Growth Corp.
ROTH does not publish research or have an opinion about this security.
ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months. The material, information and facts discussed in this report other than the information regarding ROTH Capital Partners, LLC and its affiliates, are from sources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used
as a complete analysis of the company, industry or security discussed in the report. Additional information is available upon request. This is not, however, an offer or solicitation of the securities discussed. Any opinions or estimates in this report are subject to change without notice. An investment in the stock may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Additionally, an investment in the stock may involve a high
degree of risk and may not be suitable for all investors.
