TerrAscend keeps “Buy” rating at Clarus Securities

With medical cannabis stores set to open in New Jersey and the state on the verge of legalizing adult-use pot, US cannabis company TerrAscend (TerrAscend Stock Quote, Chart, News CSE:TER) is ready to rock in Jersey, said Clarus Securities analyst Noel Atkinson in an update to clients on October 16.

Atkinson reasserted his “Buy” rating and $9.00 target price, which at press time represented a projected 12-month return of 21 per cent.

US multi-state operator TerrAscend owns The Apothecarium retail chain in California and vertically-integrated business units in Pennsylvania and New Jersey along with being a licensed cannabis producer in Canada with a cultivation and production facility in Mississauga.

New Jersey, which currently has medical-use marijuana but will put adult-use to a vote in the November 3 election, where the vote should pass, according to Atkinson, who pointed to a recent poll of citizens which found 61 per cent likely to vote in favour of legalization and 29 per cent likely to vote against it. And with neighbouring states New York and Pennsylvania (where medical-use is the rule) likely to bring in cross-border customers to New Jersey for rec cannabis and currently limited competition, Atkinson says TerrAscend should do brisk business in its three Apothecarium stores set to open (one this quarter followed by two others by mid-2021).

“We expect TER’s three stores in NJ, once at scale, to average about $27 million/year per store ($81 million per year in total). TerrAscend’s facility in New Jersey covers more than 140,000 sq ft, which we believe is one of the largest cultivation/processing footprints of any operator in the state. This should ultimately be sufficient to allow for substantial wholesaling to other stores, similar to the Company’s impressive success in Pennsylvania – where we believe TER is wholesaling to virtually every dispensary
statewide,” Atkinson wrote.

“Ultimately, we believe TER’s operations in New Jersey (wholesale plus three retail stores) could reach $270 million/year in revenue in the 2023-24 timeframe. A tight supply environment plus relatively few dispensaries also bode well for wholesale and retail cannabis pricing, so we anticipate that TerrAscend’s New Jersey operations could eventually approach the 60 per cent contributory EBITDA margin seen in recent quarters within the Pennsylvania unit,” he said.

Atkinson updated his estimates for TER and is now calling for 2020 revenue and adjusted EBITDA of $193.5 million and $46.3 million, respectively, and for 2021 revenue and adjusted EBITDA of $486.6 million and $188.0 million, respectively. (All figures in Canadian dollars.)

“We are at the high end of Street estimates for 2021-2022, as we expect powerful revenue and Adj. EBITDA growth in NJ and ongoing expansion in PA. The EBITDA margin in NJ is likely to approach PA levels (60 per cent- plus) as that state scales out. We continue to expect TER to ultimately have one of the highest Adj. EBITDA margins in the U.S. cannabis sector,” Atkinson said.

“We expect the share prices of larger, more profitable U.S. MSOs such as TerrAscend to continue to rally as they gain mindshare with investors (thanks to their size, profitability, and organic growth rates) and as the November elections approach (adult-use legalization ballots in AZ and NJ, and potential Democrat White House and Senate wins could drive federal cannabis banking/tax reform in 2021),” he said.

Atkinson said he sees momentum behind the sector regardless of who wins the race for the White House.

“U.S. cannabis multi-state operator (MSO) stocks have performed well so far in H2/20. Investors are optimistic that a Democratic win – especially a Blue sweep of Congress – will lead to reduced federal
restrictions on cannabis companies. We continue to believe that, regardless of who wins the presidential and congressional races, there is a substantial and rising likelihood of federal banking/payment and tax reforms (i.e. a SAFE Banking Act) for cannabis by the end of 2021,” the analyst said. “We see widespread and rising acceptance of cannabis in national public opinion polls across party, age, gender and education-level lines.”

But the analyst said the federal election is not the only politics on the plate.

“Besides the federal election, November 3 is also voting day in New Jersey for the referendum on adultuse cannabis. The state is the first in the U.S. to put forward a legislature-initiated ballot measure (rather than a citizen-initiated ballot) on adult-use legalization. A Braun Research poll (n=582, +/-4.6%) of 582 likely New Jersey voters in early October found 61% would vote yes and 29% would vote no. Even a majority of self-identified Republicans in the survey said they would vote in favor of legalization in the state. The Braun poll is the latest in a series of polls showing broad support in New Jersey for cannabis legalization, so we expect the ballot to pass. This, in turn, would require the state legislature to set the rules for adult-use cannabis sales, and we would expect first adult-use retail sales sometime in H2/21.

Typically, the existing medical cannabis operators in a state get grandfathered to be some of the first to produce/sell adult-use cannabis. Given that supply in NJ today is controlled by vertically-integrated
operators, we expect there will be ongoing supply constraints across the state for the first year after
adult-use sales begin (it is easier to open new stores than to launch and scale new cultivation and
processing facilities).”

At press time, shares of TerrAscend were up 2.19 per cent to $7.47.