Cannabis stocks have been one of the best-performing stocks globally in the last few months. While there are many names still down from their peak end of 2018, many other businesses have reached all-time highs again.
Just last week, Bod Australia Limited (ASX: BDA) reported year-end revenue of $6.1m. This is an increase of 350% compared to FY2019 ($1.34m). Bod trades at 3.1x EV/Sales which given this growth one can argue is below the average multiples in Australia and around the levels of the US peers.
Among the 10+ listed names in Australia, only a few are covered by analysts and share forecast financials. It is however quite clear that multiples for Australian listed cannabis companies are much higher than the Tier 1 and Tier 2 Canadian companies, and in particular the US names which selectively trade at 2-3x EV/Sales 2020 and 1.5-2x EV/Sales 2021. With annual revenue growth for 2019-2021 averaging 73% when you are a Multi-state Operator (MSO), this is an extremely compelling proposition to be bullish on US MSOs in general and even on pure play CBD names such as Charlotte's Web and cbdMD.
What causes this huge difference in multiples across the different regions?
The big difference in valuations across the globe is driven by the different stages on legalisation and commercialisation of cannabis in a country. With Australia being approximately 5 years behind Canada, the expectations of growth are huge and there is too little data to say that management teams will not deliver (the way they partly did in Canada which ultimately led to the bubble busting). Looking at some of the recent quarterly results, one can even say that management teams in Australia have been delivering great results and multiples reflect expectations of even higher growth in the future. With recreational cannabis reforms in New Zealand, the industry is a big favourite with retail investors and could see much more upside than implied in the business plans.
Canadian players went through quite a few learning lessons in the second half of 2019 and first quarter 2020. With many of the players divesting international assets to focus on the local market, the discipline of managing cash and focusing is coming back and valuations came partly down too.
The US market is the biggest market in cannabis worldwide. There has been always a big discount compared to the Canadian peers and when excluding Tier 1 names in Canada, the discount is slowly disappearing with US businesses rallying the most in the last few months. The combination of cash generative MSOs and further legalisation of cannabis in key states is attracting a lot of the bigger institutional investors and therefore stock prices have been going up quite a lot.
How does the public market compare to the private market?
It is always interesting to compare multiples in the public market to the private market. Unfortunately, there are not too many private transactions to provide a huge data set with clean EV/ Sales, however from the key European transactions in the last two years, one can see that the average EV/ Sales multiple is 16.7x Last Twelve Months (LTM) Sales. This is four to five times higher than what the multiples in the public market.
When looking at the transactions in Europe, with the exception of EMMAC Life Sciences, there is no business spanning from cultivation all the way to distribution. Most businesses focus on one part of the value chain such as medical cannabis distribution or building a brand in the CBD space.
Interesting also to see that some of the multiples which has been disclosed and were at a rather higher end of the spectrum, were the acquisitions done by Canopy Growth (This Works, C3 and Storz & Bickel).
While the last 12 months have been rather quiet in terms of big FMCG players coming into the Cannabis market, 2018 and 2019 saw three big minority investments at very steep multiples, an average 36.2x LTM/ Sales have been paid in order to participate in the future growth market and compensate with the slowing alcohol or tobacco market.
To summarise, valuations right now in the public market seems extremely low compared to transaction comparables and valuations in the private market. Given that not much has changed in terms of future growth potential and there is even less risk around policy and regulation, the industry has a really attractive valuation and provides a big chance to invest for everybody who missed out on the rally in 2018. Despite the big rally in the last 4 months, there is a lot more to come!
To read more of Alexej's work, visit Alphagreen.
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