Looking for a unique play in the cannabis sector?
AltaCorp Capital’s Kenric Tyghe published a coverage initiation on Wednesday of TerrAscend (TerrAscend Stock Quote, Chart, News CSE:TER), a name which Tyghe calls the first cannabis company with sales in the US, Canada and Europe. The analyst launched coverage with an “Outperform” rating and one-year target of C$8.00, implying a total return of 189 per cent at the time of publication.
Founded in 2017, TerrAscend was first focused on the Canadian market but has since pivoted towards the United States where it is now concentrated in three high-growth states: Pennsylvania, California and New Jersey. The company now has a modest grow operation in Canada, while its more substantial acquisition of the Apothecarium in California occurred in February 2019.
The company has since acquired Ilera in Pennsylvania, while it is currently constructing a production facility in New Jersey.
Altogether, TerrAscend has operations in four states and seven provinces with five dispensaries and three large production and cultivation facilities.
Tyghe says TER’s New Jersey and Pennsylvania footprints are notable since both states are not only attractive markets but ones currently facing supply constraints in their medical markets. Moreover, New Jersey is looking closer to moving to recreational legalization this year, the analyst said, while Pennsylvania’s is the fastest-growing medical-only state in the union, where supply issues are expected to remain a multi-year issue — or an opportunity if you’re on the right side of the curve, Tyghe said.
“These supply shortages translate into very attractive absolute and relative gross margins today, which combined with expected manufacturing efficiencies as TerrAscend ramps its capacity expansion, are expected to expand through 2021,” he wrote.
Tyghe’s valuation is an average of his DCF and EV/EBITDA methodologies and applies a 15.0x multiple to his 2021 EBITDA estimate. The analyst thinks TER will generate fiscal 2020 revenue and adjusted EBITDA of $180.7 million and $18.1 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $331.8 million and $83.6 million, respectively.
TerrAscend last reported its earnings on April 23 where its fourth quarter and full year 2019 results showed net sales for the Q4 of $25.9 million compared to $5.0 million a year earlier and full year net sales of $84.9 million compared to $6.8 million a year earlier.
The company entered Q1 2020 with cash on hand of $11.9 million and loans of $69.4 million, while subsequent to the quarter’s end, TER raised $120.0 million through a number of capital raises. (All figures in US dollars except where noted otherwise.)
“We believe TerrAscend’s West and East Coast hubs, anchored by its ownership of leading brands in California and material and quickly scaling presence in Pennsylvania, combined with very disciplined execution to date in these key markets, support our positive bias,” Tyghe wrote.
“We believe that the option value of the potential short-to-medium term legalization in either New Jersey or Pennsylvania is particularly material for TerrAscend given that Pennsylvania, New Jersey, and California represent more than 90 per cent of revenues,” he wrote.