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Ascend Wellness is a Buy, says Haywood Capital

Haywood Capital analyst Neal Gilmer launched coverage of Ascend Wellness Holdings (Ascend Wellness Stock Quote, Chart, News CSE:AAWH), saying the US cannabis MSO should see impressive growth as its assets get put to work. Gilmer started Ascend off with a “Buy” rating and target price of C$16.50/share for a projected one-year return of 57 per cent.

Founded in 2018 and headquartered in Boston, Mass., Ascend is a vertically integrated cannabis operator with assets and partners in Massachusetts, Illinois, Michigan, Ohio and New Jersey and with a pending acquisition to enter the New York market. The company focuses on emerging markets east of the Rockies, with locations in key retail corridors serving key medical and adult-use markets to drive retail economics.

Ascend is home to a number of brands, including its own Ozone and Ozone Reserve premium brands, as well as licensing agreements with Edie Parker, Lowell Smokes brand, 1906 edibles and Airopro brands vape technology.

Ascend expects to have a total of 20 retail locations opened by the end of the year and 26 by the end of 2022, while also awaiting regulatory approval of MedMen NY and its four dispensaries in New York, including a flagship dispensary on Fifth Avenue in Manhattan.

“Management is focused on going ‘deeper’ across its existing asset base, while also evaluating opportunities in other limited license states with adult-use programs now or on the horizon,” Gilmer said.

The company filed an initial public offering of 10 million shares at $8.00/share in May, then exercised its over-allotment to sell another 1.5 million shares for total gross proceeds of $92 million prior to being approved for trade on the Canadian Securities Exchange and then, starting in July, on the OTCQX Best Market. (All values in USD unless otherwise noted.)

Ascend recently reported better than expected second quarter financial results, with the company’s total revenue of $97.5 million representing increases of 28.5 per cent quarter-over-quarter and 236.2 per cent year-over-year. Meanwhile, Ascend’s six-month revenue total of $149.7 million in 2021 is already four per cent higher than the total 2020 revenue of $143.7 million.

As of June 30, Ascend’s cash and equivalents came in at $104.2 million compared to $27.4 million in debt, while the company’s $20.3 million adjusted EBITDA in the quarter represented a 28.3 per cent quarter-to-quarter increase.

The company also reported a net loss of $44.9 million, with $32 million attributable to expenses relating to the company’s IPO filing.

“Our business continues to produce impressive quarter-over-quarter revenue and adjusted EBITDA growth as we scale our wholesale and retail operations across the high-quality markets where we operate,” said Abner Kurtin, Founder and CEO of AWH in the company’s August 10 press release. “We remain focused on executing, disciplined in our approach to allocating capital, and excited about the trajectory of the Company,”

Gilmer has a positive outlook on the company’s financial metrics moving forward, projecting revenue of $341.7 million for 2021 for a 138 per cent year-over-year increase. The 2022 forecast looks even more promising from Gilmer’s perspective, as he projects $600.5 million in revenue for a potential 75.7 per cent year-over-year increase.

From an adjusted EBITDA perspective, Gilmer projects Ascend to report $84.8 million in 2021 for a 24.8 per cent adjusted EBITDA margin and 175.3 per cent year-over-year increase, with 2022 projecting $200.4 million in positive adjusted EBITDA for a 33.3 per cent adjusted EBITDA margin and a potential 136.3 per cent year-over-year increase.

Gilmer also foresees 2022 yielding a return on investment ($0.49 EPS) after losses in 2020 ($0.25/share in 2020, $0.63/share in 2021).

As with most companies in the cannabis industry, Ascend does come with its potential risks to its price target, with Gilmer specifically noting regulatory risk, facility risk, competition, execution risk, and risk associated with the United States classifying marijuana as a Schedule I controlled substance, the most restrictive classification for any narcotic.

Gilmer estimated Ascend to be trading at a discount to its peer group (2022 EV/Revenue of 3.1x and EV/EBITDA of 8.9x from consensus estimates, compared to 3.0-6.0x/10.0-15.0x for peers), the analyst believes Ascend will continue to be on the upswing with its performance.

“We attribute some of the discount to its more recent go-public transaction, limited current trading liquidity and limited track record as a public company,” he said. “We believe that over the next few quarters, investors will benefit from continued execution by management and de-risking of its growth profile.”

Gilmer noted that Ascend is currently in a significant expansion phase, with planned operations in core markets expected to add about 145,000 sq ft of production capacity this year and further expansion in 2022. That pace, along with its deeper retail presence, should put Ascend above its peer group in terms of revenue growth.

“Ascend is only producing in a fraction of its planned footprint with production capacity more than doubling by the end of 2022,” Gilmer wrote. “The increased capacity will drive retail revenue growth and opening of new locations, while also supporting management’s goal of an approximate 50/50 split between retail and wholesale sales.”

Ascend’s share price has been relatively flat over the past couple of months but the stock is still up 5.1 per cent for the year to date, with its high point of C$11.00/share coming on August 11.

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About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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