TerrAscend is a Buy in US cannabis, says Clarus

Cannabis company TerrAscend Corp (TerrAscend Stock Quote, Chart, News, Analysts, Financials CSE:TER) received a target drop from Clarus Securities analyst Noel Atkinson but Atkinson is still bullish on TER, saying in a report to clients on Thursday that TerrAscend is about to serve up a triple threat in terms of presence across three key states in the US.

Incorporated in 2017 and headquartered in Mississauga, TerrAscend Corp. cultivates, processes, and sells medical and adult use cannabis in Canada and the United States, producing and distributing hemp-derived wellness products to retail locations, and manufacturing cannabis infused artisan edibles.

Atkinson’s latest analysis comes with the introduction of Michigan-based Gage Growth to the TerrAscend estimates for 2022 and 2023, though the target drop is a product of a softened target multiple to reflect more recent peer group multiples. Atkinson has reduced his target price from $16.25/share to $14/share while maintaining a “Buy” rating for a projected a return of 95 per cent.

The Gage acquisition was originally announced in September 2021, with Atkinson now expecting the deal to close by the end of March, six to eight weeks later than originally anticipated. In total, Gage will bring 11 stores in Michigan into the TerrAscend portfolio, with an expectation for that number to grow to 20 by the middle of 2023.

In addition to Michigan, Atkinson also notes the company’s aim to diversify its revenue beyond its Pennsylvania market, with a particular focus on New Jersey as adult-use sales are set to launch in the Garden State by mid-April.

TerrAscend began 2022 with a flurry of high-level executive changes, highlighted by the appointment of Ziad Ghanem, who was previously the President of all markets for multi-state cannabis operator Parallel and a longtime Walgreens Boots Alliance, as its new President and Chief Operating Officer.

“Ziad’s cannabis industry expertise and experience, together with his significant healthcare and pharmacy background, is a rare find and makes him the ideal person for this role,” said Jason Wild, Executive Chairman of TerrAscend in the company’s January 5 press release. “Ziad’s proven success in business optimization, financial management and leadership development will be a strong asset to TerrAscend as we execute on our growth strategy.”

In addition, TerrAscend made three additional vice-presidential hires with decades of industry experience, as the company brought in Charishma Kothari as the new SVP Marketing, Charles Oster as the new SVP Sales, and Jared Anderson as the new SVP Finance and Strategy.

“These new executives have lengthy experience in pharmaceutical, cannabis and/or CPG companies,” Atkinson said. “We expect these new hires will allow Mr. Wild to focus more on strategy and capital markets and free him somewhat from managing day-to-day operations.”

Atkinson has revised a number of key financial projections for TerrAscend, as he now projects the company to finish its 2021 fiscal year with $213 million in revenue (previously $214.6 million) to imply a year-over-year increase of 44.1 per cent. (All report figures in US dollars except where noted otherwise.)

Meanwhile, with Gage coming into the picture for 2022, Atkinson has increased his revenue projection from $404.3 million to $441.5 million, forecasting more than a double at a year-over-year increase of 107.2 per cent. Atkinson also introduced a revenue projection of $653.3 million for 2023, implying a year-over-year increase of 48 per cent.

From a valuation perspective, Atkinson sees TerrAscend’s Price/Sales multiple to drop from 5x in 2022 to a projected 3.4x in 2023, though both figures are slightly behind the peer group averages of 2.8x in 2022 and 2.2x in 2023.

Meanwhile, Atkinson forecasts the company’s adjusted EBITDA margin to get wider in time, projecting TerrAscend to end its 2021 fiscal year with $68.1 million in adjusted EBITDA (previously $68.7 million) for a suggested margin of 32 per cent.

Looking to 2022, Atkinson projects a slightly wider margin at 33 per cent (previously 41.3 per cent margin), though the projection itself drops from $166.8 million to $146.6 million. In his newly added 2023 forecast, Atkinson expects the adjusted EBITDA margin to spread to 38 per cent with $248.7 million in adjusted EBITDA.

Similar to the Price/Sales multiple, Atkinson projects TerrAscend’s EV/EBITDA multiples to drop from 15.9x in 2022 to 9.4x in 2023, though those numbers are also off the pace in relation to the peer group averages of 8.4x in 2022 and 6.4x in 2023. 

“Including the effect of the pending Gage acquisition, TER is trading at a notable premium to the peer group in terms of 2022e EV/Adj. EBITDA (reflecting partial-year contributions in 2022e from Michigan and from New Jersey adult-use sales) but more in line with the peer group leaders on 2023e,” Atkinson said. “ER’s pace of expected growth would likely garner a much higher valuation multiple if the Company operated in a different fast-growth product sector (i.e., plant-based foods, semiconductors).”

Along with much of the cannabis market TerrAscend’s stock price has tumbled over the past 12 months, losing about 64 per cent of its value over that period and then dropping a further six per cent since the start of 2022. TerrAscend’s high point over the last 52 weeks was nearly a year ago when it hit $19.68/share on February 22 before falling to a 52-week low of $6.17/share on November 4.