Ascend Wellness is positioned to win key US states, says ATB Capital

ATB Capital Markets analyst Kenric Tyghe holds a positive view of US cannabis company Ascend Wellness (Ascend Wellness Stock Quote, Chart, New:AAWH), initiating coverage on August 4 with an “Outperform” rating and a 12-month target price of C$18.00/share.

Founded in 2018, Ascend is a vertically integrated cannabis operator with assets and partners in Illinois, Michigan, Ohio, Massachusetts and New Jersey. Currently with 17 stores, Ascend expects to have a total of 22 retail locations opened by the end of the year, with eight in Illinois, seven in Michigan, three in Michigan, three in Massachusetts, and one in Ohio, while also awaiting regulatory approval of MedMen NY Inc. and its four dispensaries in New York, including a flagship dispensary on Fifth Avenue in Manhattan.

The company has three individual brands: Ascend, Michigan Supply & Provisions (MS&P) which is currently transitioning to the Ascend banner, and Ohio Provisions.

Tyghe said he believes the company’s history is a good indicator for how it will operate going forward.

“We believe our price target is well supported given Ascend’s strong absolute and relative footprint in catalyst-heavy states, and strong execution to date,” Tyghe said.

Tyghe said since 2018, Ascend has rapidly scaled its presence in key states, with a particular focus on attractive, catalyst-rich, limited license markets, with a consumer-driven mantra informing its strategy and helping the company to emphasize a best-in-class experience, leading to a projected top-10 industry ranking in revenues for 2022.

Most recently, Ascend announced a partnership with California-based cannabis cultivator Lowell Farms to bring Lowell Smokes pre-rolls into its eight retail locations throughout Illinois.

“Almost overnight, Illinois has become an incredibly vibrant and exciting cannabis market with some truly exceptional product. We are glad to be partnered with Ascend and their cultivation team to bring Lowell to life in this great state,” says Lowell Farms Inc. Chairman George Allen in the company’s August 4 press release. “Legalization has been a long time coming in Illinois and we cannot imagine a place we would rather be this summer to celebrate all those that made it happen.”

Tyghe foresees the next two years as a significant step forward for Ascend, as he forecasts a revenue spike from the reported $143.7 million in 2020 to an estimated $329.2 million for 2021 for a projected 129.1 per cent year-over-year increase, followed by a projected jump to $621.4 million in 2022 for a projected 88.8 per cent year-over-year increase, followed by yet another spike to $824.3 million in 2023, which would mark a 32.7 per cent year-over-year increase. (All figures in US dollars except where noted otherwise.)

Ascend’s EBITDA is set to follow a similar growth pattern according to Tyghe’s estimates, jumping from a reported $30.8 million (21.4 per cent margin) in 2020 to a projected $84.2 million (25.6 per cent margin) in 2021, then jumping again to $223.6 million (36 per cent margin) in 2022, eventually coming to a projected $324.2 million (39.3 per cent margin) in 2023.

2022 is also the year Tyghe sees investors getting their first returns on shares, as he forecasts $0.75 in adjusted earnings per share for 2022, then jumping to a projected $1.14/share for 2023. Consequently, 2022 is also the first year for a projected price-earnings ratio, with Tyghe forecasting a ratio of 11.8x for 2022, followed by an estimated drop to 7.8x in 2023.

Key multiples also appear to be going in Ascend’s favour in Tyghe’s estimation, with the EV/Sales multiple dropping from the reported 14.1x in 2020 to a projected 6.2x in 2021, then down again to 3.3x in 2022 before another projected drop to 2.5x for 2023. The EV/EBITDA multiple is projected to fall more drastically, with Tyghe forecasting a drop from 65.8x in 2020 to a projected 24.1x in 2021 before dropping into single digits afterwards (9.11x in 2022, 6.3x in 2023).

As with most companies in the cannabis industry, Ascend does come with its potential risks to its price target, with Tyghe specifically noting slower industry growth, federal regulatory risk, operational risk, financing risk, limited financial history and modelling. 

However, with Ascend expected to report its second quarter financial results in a conference call tomorrow (August 10), Tyghe is optimistic about Ascend’s continued ascent in the industry.

“We believe that the combination of Ascend’s strong existing presence and brand portfolio in Illinois, attractive positioning in New Jersey and marked optionality in New York, dovetailing with solid execution to date and an undemanding valuation, make for a compelling story at current levels,” Tyghe wrote.

At press time, Tyghe’s C$18.00 target represented a projected one-year return of 63.6 per cent projected return.