Clarus Securities analyst Noel Atkinson believes shareholders should gauge the market on Gage Growth (Gage Growth Stock Quote, Chart, News, Analysts, Financials CSE:GAGE), shifting his rating to “Tender” for the stock while dropping his target price to C$2.55/share from C$5.50/share in an update to clients on September 2.
A Michigan-based vertically-integrated licensed cannabis company founded in 2017, Gage Growth operates nine retail locations with its Gage-brand products, while also partnering with California cannabis brand Cookies to sell its products.
Atkinson’s update comes after a deal was announced for TerrAscend, a North American cannabis operator with vertically integrated operations in Pennsylvania, New Jersey, and California, licensed cultivation and processing operations in Maryland and licensed production in Canada, to acquire Gage for $545 million, with Atkinson expecting the deal to close in the first half of 2022. The proposed deal would see Gage Growth shareholders receive 0.3001 TER shares for every GAGE share. (All figures in US dollars except where noted otherwise.)
“The deal valuation equates to a diluted market cap of $545 million (C$687 million) and the offer price was 18 per cent above GAGE’s prior-day closing price of C$2.26,” Atkinson said. “Upon closing, Gage shareholders should own about 20 per cent of TER on a fully-diluted basis and over 27 per cent of TER’s basic shares.”
Gage should prove to be a significant boost to TerrAscend’s books with an annual run rate exceeding $100 million based on second quarter results, which would have increased TerrAscend’s revenues by 45 per cent. The Gage acquisition is also TerrAscend’s first foray into the Michigan market, where Gage has ten active dispensaries with a further ten in development.
“Our shared strategic and corporate values make this combination a strong fit,” said Fabian Monaco, CEO of Gage in the September 1 release from TerrAscend announcing the definitive agreement. “We also recognize the incredible success that TerrAscend has enjoyed in recent years. We could think of no better company to partner with as we execute on our shared strategy of deep vertical integration and scale in our core markets, with a vision of creating the most consumer-centric cannabis company in the world.”
Gage recently reported its second quarter financial results, headlined by $26.4 million in revenue for the quarter for 50 per cent quarter-to-quarter growth for the company, while the adjusted gross margin rose 810 basis points from Q1 to reach 34.2 per cent, though the company also reported a negative adjusted EBITDA of $2 million.
Prior to the acquisition, Gage was busy in its second quarter, particularly on the partnership front, as the company announced a deal with recording artist Wiz Khalifa and his Khalifa Kush brand to develop and launch a line of premium cannabis products in the state of Michigan, as well as a five-year agreement with California-based boutique cannabis brand Pure Beauty to launch its product line in Michigan, as well as a partnership to bring the COOKIES brand of products to Canada.
Atkinson’s financial metrics have Gage continuing on its current growth and scaling trajectory, with a revenue forecast of $114.5 million for 2021 representing a potential 187 per cent year-over-year increase. 2022 paints an even stronger picture for the company, with Atkinson projecting $277.8 million in revenue to mark a potential 143 per cent year-over-year increase.
Atkinson expects Gage to generate positive adjusted EBITDA for the first time in the third quarter of 2021, though the figure for the year remains forecast as a loss of $800,000. However, the expectation is for significant growth to $73.7 million for 2022, which translated to a margin of 27 per cent.
Valuation data also comes into greater focus in Atkinson’s projections, with the Price/Sales multiple projected to be at 4.1x for 2021 before dropping to 1.7x for 2022. With positive adjusted EBITDA projections in place in 2022, Atkinson’s EV/adjusted EBITDA projections begin there at 5x, with the price-earnings ratio checking in at a projected 20.4x in 2022.
Overall, Atkinson believes this is an intriguing time for Gage shareholders to become TerrAscend shareholders.
“We recommend Gage shareholders tender their shares in favor of the TerrAscend acquisition bid, as management and the board, and several large stakeholders, have locked up in favor of the transaction,” he said. “Given the close relationship between principals of Gage and TerrAscend, we do not expect a higher competing bid. Moreover, other MSOs have continued to take baby steps into open-market Michigan and likely want to see retail and wholesale consolidation in the state before pursuing a significant acquisition there.”
At press time, Atkinson’s new C$2.55 target represented a projected one-year return of 9.9 per cent. Since its initial listing on April 6 at a high point of $2.89/share, Gage’s share price has dropped 20.8 per cent, albeit with a slight rebound after bottoming out at $2.00/share on April 22.