The stock may be down plenty over the past year but Beacon Securities analyst Russell Stanley is sticking to his guns on US cannabis play TerrAscend Corp (TerrAscend Stock Quote, Charts, News, Analysts, Financials CSE:TER). Stanley updated clients in a report on Thursday where he maintained both his “Buy” rating on the stock and his C$13.00 price target, which at press time represented a projected one-year return of 106 per cent.
TerrAscend, a multi-state operator (MSO) with business in Pennsylvania, New Jersey, Michigan, Maryland, California and licensed production in Canada and operator of the Apothecarium brand, announced on Thursday the closing of its major acquisition of Gage Cannabis, first announced last September. TerrAscend issued 51.3 million shares with up to 25.8 million additional shares reserved for issuance upon exercise of former GAGE convertible securities, with the deal originally valued at $545 million. (All figures in US dollars except where noted otherwise.)
“I believe the combination of TerrAscend and Gage has created one of the most compelling and differentiated operators in the North American cannabis industry,” said Jason Wild, Executive Chairman of TerrAscend, in a press release. “Our proven cultivation and manufacturing expertise, proprietary flower strains, and top-selling brands position us to deliver exceptional retail experiences and products for our patients and customers.”
Gage has 11 dispensaries currently in operation in Michigan and nine more in development along with three cultivation facilities and nine contract grow agreements. Gage also has exclusive partnerships in Michigan with COOKIES, SLANG Worldwide, Blue River, Pure Beauty and Khalifa Kush. TerrAscend has also noted GAGE’s proprietary library of genetics as a driver behind the acquisition.
“Michigan (pop. 10.0 million) is one of the largest legal markets in the US, with January sales totalling $153 million, representing $1.8 billion+ annualized,” wrote Stanley in his report. “TER’s footprint now includes five states: Pennsylvania, New Jersey, Michigan, Maryland, and California.”
“Our model assumed that the transaction would close at the end of this month, so we are leaving our estimates unchanged for now given TER is due to report its Q4 results next week (see below). We believe some of our peers have not yet reflected GAGE in their formal forecasts, and we therefore expect some upward estimate revisions to follow,” he said.
Stanley is forecasting full 2021 revenue and adjusted EBITDA of $215 million and $70 million, respectively, 2022 revenue and adjusted EBITDA of $510 million and $174 million, respectively, and 2023 revenue and adjusted EBITDA of $787 million and $307 million, respectively. On valuation, Stanley sees TER’s EV/Revenue going from 9.3x in 2021 to 3.9x in 2022 to 2.5x in 2023 and the company’s EV/Adj. EBITDA going from 28.3x in 2021 to 11.4x in 2022 to 6.5x in 2023.
Ahead of fourth quarter 2021 financials to be reported by TerrAscend on March 16 after market close, Stanley said he is looking for revenue of $54 million and adjusted EBITDA of $13 million, which is essentially in line with the consensus call of $54 million and $14 million, respectively.
“These estimates reflect solid q/q growth over the $49 million/$10 million produced in Q3, with management predicting sequential growth during its Q3 conference call in November. In addition to the results, we will be looking for management’s views on when New Jersey’s adult-use market will open, an update on the cultivation expansion in Pennsylvania, and plans for expansion in Michigan following the closing of GAGE,” Stanley wrote.
On comps, Stanley sees TER to be currently trading at 6.6x his 2023 adjusted EBITDA forecast, which represents a three per cent premium to the 6.4x average among CSE-listed US cannabis operators.
“We attribute TER’s historic premium valuation to the indirect stake in TER held by Canopy Growth and the resulting potential for Canopy to acquire TER if/when US federal laws allow it,” he wrote. “Potential company-specific catalysts include the Q4 results/commentary, buildout updates and M&A activity.”
Like the rest of the cannabis space, TerrAscend had a major run-up over the back end of 2020 and the first few weeks of 2021 before the tides turned for the sector as a whole. TER finished 2021 down 40 per cent, while so far in 2022 the stock is down a further 19 per cent.
More on the Gage deal, Wild said in a March 9 press release, “This is a defining moment for TerrAscend as we combine two leading vertically integrated operators with proven cultivation and manufacturing expertise, deep portfolios of proprietary flower strains, and top-selling brands across our core markets.”
”I look forward to working with the talented Gage team as we integrate and align our cultivation, retail, and operational practices to continue providing our patients and customers with best-in-class product offerings and retail experiences,” he said.