Buy TerrAscend for US cannabis exposure, says Clarus Securities

Clarus Securities is upping its target price on cannabis company TerrAscend (TerrAscend Stock Quote, Chart, News, Analysts, Financials CSE:TER). Analyst Noel Atkinson delivered an update to clients on Friday, saying TerrAscend’s new quarterly numbers are impressive.

TerrAscend, a US multi-state operator with vertically-integrated operations in Pennsylvania, New Jersey and California and has assets in Canada where it is a licensed cannabis producer, announced on Friday preliminary results for its fourth quarter 2020.

The company, which owns the Apothecarium retail chain and brand along with a string of other businesses and brands, announced anticipated fourth quarter net sales of $65 million, up 152 per cent year-over-year and up 28 per cent sequentially, and Q4 adjusted EBITDA of $26 million, up 46 per cent sequentially and representing an EBITDA margin of 40 per cent compared to 35 per cent for the previous quarter and 24 per cent for the Q2 2020. Those numbers would equate to full 2020 revenue of $198 million and EBITDA of $60 million. (All figures in US dollars except where noted otherwise.)

Management also reiterated its 2021 guidance which calls for net sales of $360-$380 million and adjusted EBITDA of $140-$160 million.

“Our fourth quarter results demonstrate robust sequential revenue growth and continued expansion of EBITDA margins, which reflect the strong fundamentals of our business,” said CEO Jason Ackerman in a press release. “During the quarter, we realized sales from key expansion projects in Pennsylvania, New Jersey, and California, that together with our pending entrance into the Maryland market, position the company for continued growth in 2021.”

The cannabis space has had a significant resurgence of late, but even so, TerrAscend’s rise over the past 11 months has been nothing short of spectacular. The stock hit a low of about C$2.00 last March and proceeded to climb above C$12.00 before the year was out. As of Friday’s close, TER was valued at C$19.20, having gained almost 13 per cent on Friday’s trading alone.

Atkinson says TerrAscend had a big 2020, with operations doing well on both US coasts and the company appearing to be exiting the year on a high note with record revenue and a 40-per-cent EBITDA margin.

“The year 2020 was all about Pennsylvania for TerrAscend, capturing a leading wholesale market share in that large and rapidly-growing medical cannabis state and achieving impressive revenue and adjusted EBITDA growth in the process,” Atkinson wrote in his report.

“We expect 2021 to be primarily about New Jersey as it has launched its first store in the state and completed the large second-phase buildout of its NJ production facility, which should support another two stores and a healthy wholesale operation. Maryland will also begin to contribute in 2021 and should grow substantially in 2022 as TER expands production in that state,” he said.

“For now, we are assuming that TER puts its newfound cash to work expanding its Pennsylvania retail, but we would also like to see the Company push into additional East Coast and/or Midwest markets such as New York, Connecticut, Massachusetts, Florida, Michigan and Illinois. We maintain our Buy rating,” Atkinson wrote.

The analyst has reworked his estimates, now calling for 2021 revenue of $359.1 million (previously $366.2 million) and adjusted EBITDA of $144.1 million (previously $141.6 million). For 2022, he is calling for revenue of $600.2 million (previously $606.2 million) and adjusted EBITDA of $257.3 million (previously $241.3 million).

With the higher 2022 EBITDA estimate, Atkinson has raised his target from C$18.75 to C$20.00, which at the time of publication represented a projected one-year return of 6.7 per cent.

Atkinson said the US cannabis market is very attractive for investors for a number of reasons, starting with the size: it’s a much larger market opportunity than all the other legal cannabis markets in the world put together, with potential retail sales of $50-$100 billion per year upon federal legalization or the implementation of the STATES Act.

US companies are also poised for steep revenue growth for five to ten years ahead, with profit margins that are “far above” what have so far been achieved in the Canadian market, Atkinson said, leading many US companies to already be in positive adjusted EBITDA territory.

As well, Atkinson said there appears to be increased willingness among US Senators to approve the MORE Act, which would decriminalize cannabis and usher in federal tax on sales, leading to another big bump for US-interested cannabis companies like TerrAscend, Atkinson argues, which could then list on US exchanges.

“This would likely cause a substantial increase again in the valuations of US cannabis companies, particularly larger and stronger vertically-integrated MSOs such as TerrAscend,” Atkinson wrote.

“It may also temporarily hike the valuations of those Canadian LPs cross-listed on US exchanges that serve as sector proxies, but we caution that few Canadian LPs have the size and funding to actually acquire one of the larger MSOs and we doubt that the desirable MSOs would actually be willing to hitch themselves to Canadian LPs in a stock deal when the Canadian LPs have inferior revenue and profit margins and carry (relatively) expensive valuations,” he said.