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How will Ohio's cannabis market shape up as it transitions to adult-use recreational sales? Senior analyst Pablo Zuanic outlines in his recent report the potential growth and value creation for state multi-state operators (MSOs). Zuanic’s report provides crucial insights into the market dynamics and opportunities for significant returns for cannabis investors.
Ohio is expected to begin recreational cannabis sales on or about July 1, 2024. Zuanic projects the market could grow fourfold within a year, reaching a total market size of $2.3 billion. This projection is based on an estimated $200 per capita spend, compared to other states like Arizona at $173, Maryland at $180, Missouri at $224 and Massachusetts at $250.
"We assume market share based on the future number of stores versus our projected market total by the end of year one. For example, eight stores would mean a 3.1% share of a total of 254," Zuanic said.
He also notes that "the current medical program is underdeveloped compared to states like Florida and Pennsylvania, but low store density and high demand are expected to drive this substantial growth."
These calculations consider Ohio's unique market conditions, including low store density and anticipated high demand, which will likely result in tight initial supplies.
Zuanic emphasizes the strategic importance of store locations, especially given the low prices in Michigan. "It is unclear if incumbents will choose locations or if a lottery system will apply, which could impact market dynamics significantly."
The report also highlights the role of out-of-state buyers, with four of Ohio's border states not offering recreational sales. In Illinois, out-of-state buyers accounted for about 30% of total recreational sales in the initial years. However, he notes potential challenges such as tight supply initially and the impact of homegrown cannabis limited to 12 plants per household.
Twelve publicly traded MSOs operate in Ohio, with Vext (OTC:VEXTF), Acreage (OTC:ACRDF), Cannabist (OTC:CCHWF), and Ascend (OTC:AAWH) identified as having the highest potential for market cap valuation creation. Zuanic's analysis assumes 35% EBITDA margins and a 10x EBITDA multiple for valuation. He states, "Vext could see a 471% increase in value, Acreage 275%, Cannabist 185%, and Ascend 62%."
Incumbents will have a significant advantage, accounting for approximately 34% of existing stores and 80% of the projected 254 stores by the end of the first year, including new social equity licensees.
Zuanic explains, "Publicly traded MSOs account for 34% of incumbent stores and are projected to have 80% of the 254 stores by the end of year one, as per the rules announced."
The rules allow Level I licensees to add three more stores and Level II licensees one more, translating to 80 additional stores. This regulatory framework gives incumbents a substantial head start in capturing market share.
Zuanic extrapolates total sales upside based on the percentage of stores each company has, without considering their locations or execution capabilities. He also assumes a proportional share of the wholesale market, which may not be accurate since not all retailers own cultivation facilities.
Ascend (OTC:AAWH), Cresco (OTC:CRLBF), Green Thumb (OTC:GTBIF), and MariMed (OTC:MRMD) have outperformed in wholesale market share in other states, and the same could apply to Ohio. Additionally, MSOs with limited or no presence in the state may build their presence via mergers and acquisitions.
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Ohio's medical cannabis market is valued at approximately $500 million, with first-quarter 2024 sales of $122 million, down 2% sequentially but up 2% year-over-year. Despite similar populations, Pennsylvania's medical market is 3.4 times larger than Ohio's.
As of March 31, 2024, Zaunic notes that Ohio had 167,153 active patients, a decrease from 184,958 in September 2023. The state has issued 123 certificates of operation for dispensaries and nine provisional licenses, with average sales per store just over $4 million.
According to the report, wholesale prices in Ohio have stabilized, averaging $6.10 per gram in mid-April 2024, up from a low of $5.83 in October 2023. The transition from medical to recreational sales in other states has shown growth ranging from two to five times.
Photo: AI-Generated Image.
