Ascend Wellness gets a “Buy” rating from Echelon Capital

Calling the company ascendant in the US cannabis industry, Andrew Semple of Echelon Capital Markets launched coverage of Ascend Wellness Holdings (Ascend Wellness Stock Quote, Chart, News CSE:AAWH) on December 7 with a “Buy” rating and target price of C$13/share, saying Ascend has exceptional retail stores, expanding cultivation canopy and strong organic growth prospects.

Founded in 2018 and headquartered in Boston, Ascend is a cannabis operator that cultivates, produces and distributes both medical and adult-use cannabis products in the United States.

“Ascend is one of America’s fastest-growing cannabis companies, driven by its laser focus on the nation’s most attractive limited-license markets,” Semple said. “It is vertically integrated across all markets, has demonstrated strong branded product distribution at wholesale and operates a highly productive retail store network.”

According to Semple, Ascend has significant expansion plans beyond the 118,000 square feet of growing canopy it currently operates in Illinois, Michigan, New Jersey, Massachusetts and Ohio, with ongoing or recently-completed expansion efforts in all five states.

With regulatory approvals and construction timing in mind, Ascend is hoping to expand its footprint to 176,000 square feet by the end of 2021, with the entirety of the expansion coming in Illinois, more than doubling its canopy in the state to 113,000 square feet.

Ascend expects its 2022 expansion to reach 274,000 square feet of canopy, with Semple noting investments in Massachusetts (37,000 square foot expansion, expected to be ready in the opening quarter of 2022) and Ohio (increased capacity to 37,000 square feet, including a quad-stacked cultivation room). New Jersey is also another significant growth target for Ascend, as the company looks to reach a total of 42,000 square feet in cultivation canopy by the end of the year.

The Garden State also figures prominently into Ascend’s 2023 expansion plans, as the company intends to hit the regulatory maximum of 150,000 square feet in the state to give Ascend 382,000 square feet in total, more than triple its current canopy.

Thanks in large part to these expansion efforts, Ascend is aiming to have net wholesale revenues account for half its overall sales compared to 33 per cent in the last quarter, while also gradually increasing the proportion of its own brands sold at its own stores, namely its flagship Ozone premium and Ozone Reserve ultra-premium brands of including dried flower, edibles and vapes, towards the 50 per cent level.

Ascend’s most recent quarterly results came in November, headlined by $105 million in revenue for increases of 7.7 per cent quarter-over-quarter and 131.4 per cent year-over-year, and adjusted EBITDA of $23.5 million for a 15.9 per cent quarter-over-quarter increase and a margin of 24.9 per cent.

“I am pleased with the company’s performance during the quarter as we delivered solid sequential revenue growth and substantial improvements in our Adjusted EBITDA margins,” said Abner Kurtin, Founder and CEO of Ascend Wellness in the company’s November 11 press release. “Our focus continues to be scaling our asset-base of premier retail locations and state-of-the art cultivation facilities in top limited license markets. With both our total canopy and number of retail dispensaries poised to meaningfully expand, we remain encouraged about the growth potential of our existing portfolio.”

After Ascend produced revenue of $143.7 million in 2020, Semple is projecting a large leap in 2021, with his $335.5 million estimate representing a potential year-over-year increase of 133.4 per cent; in 2023, he projects another jump to $496.5 million, a potential year-over-year increase of 48 per cent. (All figures in US dollars except where noted otherwise.)

Semple also projects wider company margins, as he forecasts the company’s gross margin to grow from the reported 42 per cent in 2020 to 44 per cent in 2021 before reaching a projected 49 per cent in 2022. Adjusted EBITDA follows a similar track to revenue, with the raw adjusted EBITDA growing from the reported $30.8 million in 2020 (21.4 per cent margin) to a projected $80.2 million in 2021 (23.9 per cent margin), then jumping to a projected $141 million in 2022 (28.4 per cent margin).

Notably, the 2022 revenue and EBITDA projections come in below the consensus estimates of $555 million and $164 million, respectively.

Ascend’s valuation data also stands strong in relation to its peer group, with Semple forecasting the company’s EV/Sales multiple to drop from 7.3x in 2020 to 3.1x in 2021 and 2.1x in 2022, a discount to the peer group targets of 16.8x in 2020, 7.2x in 2021 and 4.9x in 2022.

From the EV/EBITDA perspective, Semple projects a significant drop from the 33.9x reported in 2020 to 13x in 2021, then to a projected 7.4x in 2022. By contrast, the peer group targets for the same period come in at 78.2x in 2020, 30x in 2021, and 17.1x in 2022.

Ascend’s share price has fallen by 40.6 per cent over the course of the year, hitting a high point of US$11/share on August 11. At the time of publication, Semple’s C$13.00 target represented a projected return of 136.8 per cent.