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Ascend Wellness is trading at a discount to peers, Beacon says

Russell Stanley of Beacon Securities is actively keeping an eye on Ascend Wellness Holdings (Ascend Wellness Stock Quote, Chart, News CSE:AAWH), maintaining a “Buy” rating and C$18/share target price for an implied return of 227 per cent in an update to clients on Monday.

Founded in 2018 and headquartered in Boston, Ascend Wellness is a vertically integrated MSO that produces and distributes medical and adult-use cannabis products in the United States, with operations or interests in Illinois, Massachusetts, Michigan, New Jersey and Ohio. The company produces and distributes Ozone branded products and is trying to make inroads into New York through its pending acquisition of MedMen, though the matter is now before the courts, which is the root of Stanley’s updated analysis.

Specifically, Ascend has filed a complaint commencing a lawsuit in the Commercial Division of the Supreme Court of New York against MedMen with the claim that MedMen recently tried to terminate an agreement between the two in which Ascend would pay $73 million from 87 per cent of MedMen’s New York operations, which was initially given final approval by the Cannabis Control Board on December 16.

On the matter, Stanley wrote, “An article in the Times Union last week included a compelling quote from Freeman Klopott, a spokesperson for the Office of Cannabis Management: ‘Both companies were notified prior to Jan. 1 that the Cannabis Control Board’s approval of this change in ownership at its Dec. 16 meeting was final.’ Given the clarity of that quote, we remain highly confident that Ascend will prevail in closing this transaction, though the timing is obviously uncertain given it now involves litigation.”

According to Stanley, the summons means MedMen must answer the complaint within 20 days of being served, or 30 days if the service happens outside New York. Ascend also has the option to amend the complaint if MedMen does not agree to cover Ascend’s losses as a result of the delayed close.

“As New York and other states adopt adult use of cannabis, MedMen’s actions send the worst message – namely, that certain cannabis companies cannot be trusted to keep their word,” Ascend said in a January 3 press release. “AWH calls on MedMen to honor the commitment it made to New York, to its own investors and to AWH and promptly close the transaction. AWH will continue to pursue all measures to encourage MedMen to honor the Investment Agreement and close the transaction.”

Ascend has room for expansion in New York, with its present cultivation facility in Utica occupying just 11,000 square feet on five acres of land and an option to acquire five more, though the company has a 21,000-square foot shell ready to build. 

With an altered expectation for the deal to close at the end of this year, Stanley has made some revisions to his 2022 financial projections for Ascend, lowering the EBITDA forecast from $143 million to $141 million, with the new figure representing an implied year-over-year increase of 74.1 per cent over the $81 million forecasted in the final 2021 figures, as well as being an implied margin of 29.9 per cent on the forecasted $472 million in revenue. (All figures in US dollars except where noted otherwise.)

Meanwhile, the $81 million in EBITDA projected for 2021 produces an implied margin of 24.5 per cent on the reported $330 million in revenue.

Stanley’s forecasts for 2023 remain unchanged at $803 million in revenue (year-over-year increase of 70.1 per cent) and $271 million in EBITDA for a 90.8 per cent year-over-year increase, and an implied margin of 33.7 per cent.

Stanley noted that if the New York forecasts were to be completely excluded from his projections, the 2023 EBITDA forecast would drop by $17 million while also cutting the price target by a dollar.

“Notwithstanding the setback a delay would represent with respect to cultivation expansion, we remind investors that this transaction also involves one of just four dispensaries currently operating in Manhattan (5th Avenue near Bryant Park), which should do very well once the adult-use market opens, as well as a dispensary in each of Long Island, the Buffalo area and Syracuse,” Stanley said.

From a valuation perspective, Stanley is forecasting the company’s EV/Revenue multiple to drop from a projected 3.2x in 2021 to a projected 2.2x in 2022, then to 1.3x in 2023. The EV/adjusted EBITDA multiple projection follows similarly, with Stanley estimating a drop from the projected 12.9x in 2021 to 7.4x in 2022, then to 3.9x in 2023 to present a 57 per cent discount in relation to the 8.9x average amongst CSE-listed US operators.

Ascend’s stock price has done the exact opposite over the last 12 months, descending in value by 43.1 per cent and dropping gradually since hitting a 52-week peak of C$11/share on August 11.

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About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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