TerrAscend has more upside, says ATB Capital

The regulatory environment in the United States is potentially turning in favour of cannabis companies, which is good news for multi-state operator TerrAscend (TerrAscend Stock Quote, Chart, News, Analysts, Financials CSE:TER). That’s according to ATB Capital Markets analyst Kenric Tyghe, who in an update to clients on Thursday resumed coverage of the stock, giving it an “Outperform” rating and one-year target of C$18.00.

TerrAscend has vertically integrated operations in Pennsylvania, New Jersey and California along with operating as a licensed producer in Canada and operates the Apothecarium chain of dispensary retail locations and a number of brands. The company announced on Thursday the closing of a previously announced, over-subscribed private placement issuing about 18 million shares at C$12.35 per share for proceeds of C$244 million. TER said 80 per cent of the funds came from four large US institutions investors and ATB Capital was the company’s financial advisor on the offering. Management said the proceeds will go towards organic expansion and M&A activity.

“I’m thrilled with the strong demand we received during our recent oversubscribed offering and thankful for the continued support of our investors as we execute our growth strategy,” said Jason Ackerman, CEO and Executive Chairman, in a press release. “With our strengthened balance sheet, our focus remains on continuing to go deep and build scale in our existing markets, while pursuing M&A transactions to further accelerate our growth and expansion.”

For his part, Tyghe said he’s revising his estimates for TER higher due to recent positive changes to market growth estimates for the company’s key states as well as a change to valuation assumptions largely due to what he sees the expected passing of the SAFE and/or the MORE Acts and the potential for movement at the federal level due to the currently Democrat-controlled Congress in the US.

As a reminder, the SAFE Banking Act would allow banks to work with cannabis companies while the MORE Act (the Marijuana Opportunity Reinvestment and Expungement Act) would remove cannabis from the list of Schedule 1 controlled substances. Both Acts have been passed by the US House of Representatives but have yet to be passed by the Senate.

“While the Democrat control of congress is a potential major catalyst for the space on its imputed pull forward of Federal legalization, the more relevant window and reset for U.S. MSOs in reality relates to the expected passage of the SAFE and MORE Act. A potential passing of the SAFE Act in 2021, dovetailing with potential legalization of adult use in Pennsylvania, are both material near-term catalysts for the Company in our opinion,” Tyghe wrote.

The analyst has updated his estimates to reflect what he sees as changes in TerrAscend’s growth trajectory and margin profile expectations in the company’s key markets along with potential adult-use legalization in 2022 in Pennsylvania and/or Maryland. Tyghe is now calling for full 2020 revenue of $199.4 million and adjusted EBITDA of $57.9 million, for 2021 revenue and EBITDA of $374.4 million and $156.2 million, respectively, and for 2022 revenue and EBITDA of $531.7 million and $234.3 million, respectively. (All figures in US dollars except where noted otherwise.)

Tyghe’s updated valuation — a 20.0x multiple (from 16.0x prior) on 2022 EBITDA, which is a premium versus TER’s relevant peer group at 17.7x — comes from the US MSO rerating, which Tyghe says itself was due to market dynamics related to increased regulatory visibility, de-risking of the industry and an increased access to capital. Tyghe has moved his target price from C$15.00 to C$18.00, which at the time of publication represented a projected one-year return of 15.7 per cent.

“Our new price target is based on the blended average of our DCF and EV/EBITDA valuation methodologies, which imputes a value of C$17.69. Our EV/EBITDA valuation rolled forward to 2022 applies a new 20.0x (from 16.0x prior) to our revised EBITDA of $234.3 million,” Tyghe wrote.

“We believe that our new target multiple appropriately reflects TerrAscend’s strong absolute and relative expected growth prospects in its key markets of Pennsylvania, New Jersey, California and Maryland. TerrAscend’s DCF terminal value represents roughly 76.1 per cent of our DCF valuation of while our EV/EBITDA valuation imputes an exit multiple of 15.0x,” he said.

Tyghe said TerrAscend is in a good spot in New Jersey, where it recently completed the 80,000-sq-ft second phase expansion of its Boonton facility (first harvest expected in Q1/2021). Tyghe said supply is currently constrained in New Jersey’s medical market and as a licensed medical operator in the state, TER will be able to begin adult-use sales immediately upon the passing of the regulations, representing “an attractive window of opportunity” as newer operators will scramble to play catch-up.

Pennsylvania, which is also expected to legalize adult-use over the next 12-18 months, is expected to increase over the medium term its cap on dispensaries from the current 100 to 150, representing a “material tailwind” for wholesale-focused TerrAscend, Tyghe said.

Finally, only TER’s prospects in Maryland, Tyghe said, “With the expected imminent closing of the HMS acquisition in Maryland, TerrAscend will also begin wholesaling in a market that’s worth roughly $600 million today that in large part mirrors Pennsylvania in terms of management and structure.”