Ascend Wellness is a triple, says ATB Captial

After fourth quarter numbers, ATB Capital Markets analyst Kenric Tyghe still likes the look of cannabis stock Ascend Wellness (Ascend Wellness Stock Quote, Chart, News CSE:AAWH). Tyghe maintained an “Outperform” rating in his newest update to clients on Tuesday while lowering his one-year target from C$13/share to C$12/share on a more cautious growth forecast.

Boston-based Ascend Wellness is a vertically integrated multi-state operator that produces and distributes medical and adult-use cannabis products in Illinois, Massachusetts, Michigan, New Jersey and Ohio. The company is focused on emerging markets east of the Rockies, with flagship locations in desirable retail corridors serving key medical and adult-use markets. The company produces and distributes Ozone branded products.

Tyghe’s latest analysis comes after Ascend released its fourth quarter financial results along with 2021 year-end figures. The results were in line with expectations although Tyghe noted company management’s cautious tone in its preview for 2022.

“The results in-quarter largely reflected pricing pressures and volume declines in Illinois (where, despite these pressures, Ascend gained market share) and in Massachusetts, which were implied in the conservative Q4/21 guide (aka no major surprises in the Q4/21 puts and takes),” Tyghe said.

Ascend’s quarterly report was headlined by revenue of $88.5 million, which was largely on par with the consensus projection of $88.9 million and the ATB projection of $89.8 million, though it also represented a sequential decrease of 6.1 per cent despite being a year-over-year jump of 63 per cent. Tyghe attributed the decrease to pressures stemming from macro pressure and supply dynamics, leading to lower wholesale prices (Illinois) and lower wholesale volumes (Illinois and Massachusetts), only partially offset by share gains in Illinois. (All figures in US dollars except where noted otherwise.)

The company’s fourth quarter adjusted EBITDA came in at $19.8 million, essentially in line with the consensus estimate of $19.9 million the ATB projection of $20.4 million, meaning a margin compression to 22.3 per cent. However, Tyghe noted that the slower growth in this category has highlighted the opportunity to improve process, human capital and workflow as per the company’s 2022 cost cutting initiatives.

Gross profit came in at $37.5 million, translating into an additional margin compression to 42.4 per cent, which reflects the material drag of pricing pressures, tougher than expected sledding in securing shelf space in Massachusetts, which then dovetailed with manufacturing efficiency drags that more than offset retail pricing.

“2021 was a year marked by record sales and the achievement of many significant milestones. I am proud of the team for everything we have accomplished throughout the year,” said Abner Kurtin, Founder and CEO of Ascend Wellness in the company’s March 8 press release. “Although competitive conditions arose in the fourth quarter, I remain confident in the longer term potential of the industry. Q4 2021 through the first half of 2022 represent a bit of a pause for Ascend as we bring new assets online. As we enter 2022, we are working to optimize our asset base, improve our market positioning, and prepare for the highly-anticipated New Jersey adult-use market.”

With management’s more muted tone in mind, Tyghe has lowered some of his future financial projections for the company, lowering his 2022 revenue target from $503.2 million to $444.1 million for a 33.6 per cent year-over-year increase. Tyghe also reduced his 2023 projection from $724.4 million to $648.1 million, which still implies a year-over-year increase of 45.9 per cent.

From a valuation perspective, Tyghe forecasts a continued drop in the company’s EV/Sales multiple from 2.3x in 2021 to 1.7x in 2022, then to a projected 1.2x in 2023.

“The cautious 2022 outlook, whereby management expects revenues in both Q1/22e and Q2/22e to loosely bracket Q4/21 prior to a material step-up in H2/22e, largely reflects the delay on the start of adult use in New Jersey, the ripple effect of the retail license delays in Illinois, and challenges in ramping wholesale in Massachusetts,” Tyghe said.

The lowered projections also apply to the company’s adjusted EBITDA, as Tyghe now forecasts a 2022 figure of $116.7 million (previously $144.4 million), compressing the projected margin from 28.7 per cent to 26.3 per cent. The 2023 forecast follows a similar path, with Tyghe reducing his estimate to $214.4 million (previously $242.3 million) for a margin of 33.1 per cent.

In terms of valuation, Tyghe projects the company’s EV/adjusted EBITDA multiple to drop from 9.7x in 2021 to 6.6x in 2022, then to a projected 3.6x in 2023.

Ascend Wellness’s stock price has been descending in value by 35.3 per cent since the start of 2022, contributing to a loss of 59 per cent over the last 12 months. The stock was riding steady at a 52-week high of C$11/share in the first week of August, but has dropped precipitously since then, with its present trading value of C$4/share constituting a 52-week low. At press time, Tyghe’s C$12 target represented a projected one-year return of 200 per cent.