Sending a feeler out to the WSO community to see if anyone has experience across Cannabis valuations in today's market. Did a quick search but appears most threads are 5+ years old and the industry is completely different now and changing rapidly. Would be great to hear from other monkeys involved in the industry.
I'm particularly interested in valuing retail dispensaries and what a single dispensary valuation would look like vs. multi-dispensary model. There are lots of unknowns across this industry and valuations are all over the place. Some questions below if anyone has any insight:
- Discount rates: What is everyone using for appropriate discount rates? It's obviously a risky business at this point and the comp sets are limited (though growing every day). How are you discounting future CF and building in the risk of the industry never becoming federally legal, becoming federally legal, states opening up a huge supply of licenses that floods the markets with new entrants, etc? What does an appropriate discount rate truly look like?
- Valuing a vertically integrated company vs. a purely retail-only operation. Better margins will be had with the former but eventually, cannabis will be so commoditized there may be little to no value in being vertically integrated unless required by the state its operating in.
- # of licenses: What premium do you attribute to a business that is operating 20 retail operations with 20 licenses vs. a single retail operation with a single license? Also, those companies that hold the only license in a city vs a retail operation that owns 1 of 20 in a specific city, outside of # of customers, what effects are you seeing?
- Multiples: Multiples are insane right now with many companies with negative EBITDA and being valued off of revenue. Looks like forward-looking multiples 2-3+ years come into reality when companies begin to generate EBITDA and the multiples come back to earth. How are you approaching this?
Seems like more and more boutique PE shops are strategically getting into the ancillary side of Cannabis and slowly moving into the plant touching operations. Would be great to start a conversation. Cheers.
How high a discount rate are you using?
Based on the comps, this could be anywhere from 15-25%.
Ouch - I guess the growth trajectory counteracts that
Sounds about right. Currently at a shop that has done a few cannabis deals and all discount rates are closer to 20%
You would want to use a VC/angel style valuation model because as you said, classic PE multiples of EBITDA don't work.
I discussed this with a few of the guys I know investing in cannabis and they didn't really have a real approach. Undisciplined and unsophisticated like most VCs.
ER analysts covering the stocks are using EV/Revenue or EV/Rev/Rev Growth
CIBC has a primer on cannabis industry that you should be able to Google with the right key words.
Having trouble finding it. Any link would be appreciated.
https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.invest…
Google "CIBC cannabis report pdf" first result
My advice: keep unsystematic risks out of your discount rate
Most of the risks you list are not systematic risks and therefore I prefer not to correct for them in your beta nor overall discount rate. Adding a few percentage point to WACC is very arbitrary and almost impossible to interpret as you use it in a non-linear function.
Alternative
In my view most appropriate would be a discount rate derived from a mature adjacent industry (e.g. (food)retailing, leisure or pharma) and then make separate forecasts for the key business risks you describe. Assign a probability to each of them (that add up to 100%) to get to a valuation. This way you can handle sector specific trends that will have a different impact on every business.
What are some typical multiples used to value cannabis companies; I know they are negative earning so EV/EBIDTA ; P/E; and EV/EBIT don't work, but what multiples beyond EV/Revenue are widely used?
Bump
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