The nation’s largest multi-state marijuana operators could collectively draw on nearly $ 2 billion in debt if someone wanted to borrow money to expand capacity, make acquisitions, or buy back stock.
This finding underscores our earlier assertion that large multi-state marijuana MSOs are in good shape to withstand the current turbulent economic environment, where rising inflation and rising interest rates are fueling fears that the economy is headed for a recession.
multi-state marijuana, share prices have fallen, making it difficult for cannabis companies to issue shares to raise money. However, the lower stock prices make it more attractive for Cannabis MSOs to buy back their stock when they have funding from other sources, such as stocks. B. Debt financing available.
Let’s get into the numbers.
Strong cash positions
For large MSOs, their liquidity positions are strong. And they should be positive for free cash flow in 2023.
Our conservative calculations show that the group of 12 companies shown in the graph above has a total of approximately $ 1.9 billion of unused debt capacity. In our analysis here, we wanted to take a particularly cautious look at the ability of MSOs to raise additional funds through debt financing.
We analyzed 12 MSOs with a market capitalization of over $ 300 million.
We calculate each company’s incremental or incremental borrowing capacity based on analyst consensus estimates of EBITDA, tax and capital expenditures.
We have calculated the cash flow available to pay the corresponding interest expense. We then take that free cash flow and divide it by a desired interest coverage ratio to calculate the interest expense each company could afford.
The interest coverage ratio determines how easily a business can earn interest on its outstanding debt. We use double coverage for this exercise, recognizing that this is a conservative move for an industry like cannabis, which is growing and relatively recession-proof.
We then take the interest expense and divide it by an estimate of a reasonable interest rate for that group of companies. We use 12% as a conservative number, recognizing that several companies on our list took out loans at rates below 10% in 2021.
Unused debt capacity
The resulting numbers gave us the total debt that we believe would currently justify the company’s cash flow; in other words, that untapped debt capacity of $ 1.9 billion. Finally, from this number, we subtract each company’s net debt (debt minus cash) to find each company’s additional debt capacity.
Note that the incremental leverage of several companies, including Jushi Holdings (CSE: JUSH), 4Front Holdings (CSE: FFNT), and Ascend Wellness (CSE: AAWH), is negative, mainly because these companies have significant development plans. which will go online between the end of 2023 and 2024. As these projects are nearing completion and fuel analysts ‘estimates, we expect these companies’ calculated debt carrying capacity to increase.
At the other end of the spectrum, Planet 13 Holdings (CSE: PLTH), Green Thumb Industries (CSE: GTII), Ayr Wellness (CSE: AYR.A), and Verano Holdings (CSE: VRNO) seem to be worth more. over $ 150 has millions of additional lending capacity. Suppose a company has additional borrowing capacity based on its cash flow and its shares are trading below their intrinsic value.
In this case, it is natural to consider the possibility of a share buyback. In addition to the additional lending capacity, the graph shows what percentage of each company’s current market capitalization could be redeemed by the company’s additional lending capacity.
Four companies appear to have the ability to repurchase more than 10% of their shares: Planet 13, Green Thumb, Ayr and Verano. It’s worth noting that based on these numbers, Ayr and Planet 13 seem capable of extensive recapping operations. Investors should take this into account in their valuation calculations.
However, in the current volatile economic environment, we do not expect many of these companies to participate in share buyback programs. But at today’s prices, being confident in your cash flow must certainly be attractive.
