TerrAscend wins bullish new price target at Beacon

Quarterly numbers came in as expected for TerrAscend (TerrAscend Stock Quote, Chart, News, Analysts, Financials CSE:TER), according to Russell Stanley, analyst for Beacon Securities, who delivered an update to clients on Wednesday in which he raised his price target. Stanley said TerrAscend’s expansion efforts in Pennsylvania and New Jersey are bearing fruit, while the stock still trades at a discount to its peers.

Multi-state operator TerrAscend has cannabis assets in Pennsylvania, California, New Jersey and Canada and is the largest wholesaler in Pennsylvania with an estimated 20 to 25-per-cent market share, along with being one of 12 companies with licenses to operate in New Jersey. Among others, TerrAscend operates the Apothecarium line of retail stores and products.

TerrAscend announced on Tuesday its fourth quarter and full 2020 financials after having previously reported preliminary results. The company saw Q4 net sales climb 152 per cent year-over-year and 28 per cent sequentially to $65 million, while adjusted EBITDA for the quarter hit $26 million compared to $18 million a year ago. EBITDA margins went from 35 per cent in the third quarter to 40 per cent. (All figures in Canadian dollars except where noted otherwise.)

For the 2020 year, TerrAscend’s revenue more than doubled to $198 million compared to $85 million a year earlier, while adjusted EBITDA was $60 million compared to a loss of $27 million for 2019.

The fourth quarter was a busy one for TER, which closed on a US $120-million term loan in Pennsylvania for an earnout payment related to its 2019 purchase of Ilera Healthcare, closed on a US$20-million loan from Canopy Growth on the company’s Arise Bioscience division, acquired Maryland-based HMS Health, opened the company’s fifth Apothecarium dispensary in Capitola, California, and received a medical cannabis dispensary permit in New Jersey for its first store in Phillipsburg.

TerrAscend followed up the Q4 with a $224-million private placement in January and it obtained a cannabis processing, extraction and manufacturing permit in New Jersey.

“Looking at our growth plans for 2021, we are well positioned to continue our momentum,” said Executive Chairman Jason Wild in a press release. “The business is firing on all cylinders and we are only now just beginning to realize the benefits of our recently completed investments. Sales from facility expansions in Pennsylvania, New Jersey, and California are just starting to come to market, our acquisition in Maryland is expected to close imminently, and two additional retail stores are set to open in New Jersey.”

Even with the stock down substantially over the past month, TER has had a heck of a year. TerrAscend went $2.00 this time last March to as high as $20.00 by February 2020. The stock has since pulled back to $13.49 as of Tuesday’s close, but Stanley thinks there’s upside from here.

The analyst has reaffirmed his “Buy” rating for TER with a new target of $16.00 (previously $13.50), which at press time represented a projected 12-month return of 19 per cent.

“TER reported Q4/20 revenue/adjusted EBITDA of $65 million/$26 million (a 40-per-cent EBITDA margin), in line with its previously reported preliminary results. In addition to strong quarter-on-quarter improvement in EBITDA margins (from 35 per cent to 40 per cent), TER also delivered cash from operations of $24 million, representing a CFO margin of 37 per cent,” Stanley wrote.

TER recently made a shift with former CEO Jason Ackerman stepping down and Wild becoming executive chair. Stanley said differing philosophies with respect to management style and culture were of issue. “We understand that the senior management team has stepped up very well while a CEO search is underway,” Stanley said.

Stanley noted TER updated guidance, which calls for over US$290 million in 2021 revenue and over US$122 million in adjusted EBITDA (TerrAscend is from its Q1 2021 forward reporting in US dollars). Management had earlier guided for $360-$380 million in revenue and $140-$160 million in adjusted EBITDA, putting the new guidance (and based on a C$1.3082 exchange rate) as a beat of the high end of the previous outlook, with optimism on its Pennsylvania and New Jersey operations as the cause.

For his part, Stanley has also increased his estimates and is now calling for 2021 revenue of $355 million (previously $343 million) and EBITDA of $138 million (was $133 million).

On the company’s rollout in Pennsylvania, Stanley wrote, “TER continues to have ~100-per-cent penetration of the state’s 110 dispensaries (of 198 licensed). Management noted that its recent 25 per cent capacity expansion began contributing to revenue approximately halfway through Q4, so it should have a more meaningful impact in Q1/21.”

“We believe that further expansion efforts in 2021, including the conversion of a hybrid greenhouse to a double-stacked indoor facility, could expand capacity by a similar magnitude. On the retail front, management reported that its three stores increased run rate revenue by 33 per cent quarter-on-quarter in Q4, supported by a 24-per-cent increase in patient count. Given TER could add 12+ dispensaries in this market before reaching the state limit, we believe the addition of retail in PA remains a priority for management,” Stanley wrote.

The analyst said TER is currently trading at 14x his 2022 EBITDA forecast, which represents a 13 per cent discount to the 16x average among its US operator peers and a 39 per cent discount to the 23x average of its broader peer group.