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Cannabis MSO survival period ‘could separate the Colas from the Popcorns,’ analysts say

Cannabis multi-state operators (MSOs) in the US continue to face challenges after Congress failed to pass the Secure and Fair Enforcement (SAFE) Banking Act in 2022, which would protect banks and financial institutions providing services to legitimate cannabis businesses from penalties, with investor enthusiasm at an "all-time low," according to analysts at Stifel GMP.

However, analysts believe this survival period could strengthen some operators by triggering strategic decisions to streamline businesses and better cash flows. In a note to clients, the analysts wrote that they have seen operators exit cash-burning business segments and restructure margin dilutive operations to bolster their cash generation.

"This year, we expect most of our coverage could generate positive free cash flow with greater clarity likely on 4Q/22 results, an impressive feat for companies that pay 60% to 200%-plus effective tax rates," they wrote.

"The lower CAPEX could translate to a better supply-demand balance into 2024, which may also coincide with the next potential federal catalyst; the culmination of President Biden's schedule review where we believe cannabis may be moved into Schedule II or III, the latter we estimate could improve company 2023e cash flows by 1/3rd to over 2.5x."


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