Clarus Securities analyst Noel Atkinson likes the new acquisition by cannabis multi-state operator TerrAscend Corp (TerrAscend Stock Quote, Charts, News, Analysts, Financials CSE:TER). In an update on Monday, Atkinson reviewed TerrAscend’s proposed buy of KISA Enterprises and its Michigan operations in a deal pegged at $28.5 million.
TerrAscend, which has vertically integrated cannabis businesses in Pennsylvania, Michigan, New Jersey and California along with licensed production capacity in Canada, announced on April 14 that it has entered into a definitive agreement to acquire KISA, with the deal involving six retail dispensary licenses, five of which are currently operational under the Pinnacle brand in the cities of Addison, Buchanan, Camden, Edmore and Morenci. TerrAscend said the purchase price will come by way of $10 million in cash to pay down liabilities, $8.5 million in TER stock and $10 million in promissory notes. (All figures in US dollars except where noted otherwise.)
“We are excited to begin working with the Pinnacle team and can’t wait to roll out our high-quality Gage and Cookies branded products at these dispensaries,” said Jason Wild, Executive Chairman of TerrAscend, in a press release. “Michigan is a key market for us. This acquisition exemplifies our strategy of building depth to solidify our retail leadership while expanding profitability and scale in the state.”
After rising from about C$3.00 per share in 2020 to as high as $19.97 in February of last year, TerrAscend’s share price pulled back with the market downturn on cannabis, dropping to the $7.00 mark by October of last year. The stock has stayed in that range since, but Atkinson sees upside from here, calling for TER to hit a target price of $11.00 over the next 12 months.
“It appears TER continues to be highly opportunistic with acquisitions – it is acquiring a portfolio in attractive locations at a reasonable price and then converting them to in-house banners (and stocked with proprietary products) that have typically generated average customer basket size well above the Michigan state average,” Atkinson wrote in his April 18 note to clients.
“We believe TER will achieve one of the fastest revenue growth rates of any larger U.S. MSO during 2022e and 2023e, thanks to its Mid-Atlantic and Michigan operations,” he said.
Atkinson said management has the stated aim of hitting 20 dispensaries in Michigan by the end of 2022, and so, with 17 active dispensaries upon closing of the KISA deal (expected to close at the start of the fourth quarter of this year), the company is well on the way to 20. Atkinson said a new store in Ann Arbor was opened earlier in April under TerrAscend’s Cookies banner.
On TerrAscend’s financial performance, Atkinson is calling for the company to hit revenue of $387.5 million in 2022 followed by $629.8 million in 2023. Adjusted EBITDA is expected to go from $65.6 million in 2021 to $114.8 million in 2022 to $224.5 million in 2023. On valuation, the analyst has a P/E ratio of 58.7x for 2022 numbers and 21.2x for 2023 estimates, while EV/adjusted EBITDA is put at 19.6x for 2022 numbers and 10.0x for 2023 numbers.
Atkinson said while TerrAscend is higher up on the comps scale, its growth trajectory merits the special treatment.
“TER continues to trade at a premium to the peer group in terms of 2023 EV/Adj. EBITDA, which we believe reflects TER’s large weighting to the exciting New Jersey market, a tight ownership structure, the close relationship with Canopy Growth and the financial backing of JW Asset Management,” said Atkinson.
“We also expect TER to achieve 63 per cent Y/o/Y organic revenue growth in 2023 as well as 96 per cent Adj. EBITDA growth – well above the peer group consensus average of 31 per cent revenue growth and 46 per cent Adj. EBITDA growth in 2023. TER’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),” he said.
With the update, Atkinson has reiterated his “Buy” rating on TerrAscend along with his $11.00 target, which at press time represented a projected one-year return of 56.0 per cent.
“We believe our target multiple is reasonable given our expectation for TER to achieve strong revenue growth in 2022 and 2023 and achieve Adj. EBITDA margins in 2022 and 2023 that are at or above the peer group average. We consider TER’s current share price to be an attractive entry point for investors with a 12-month time horizon, and we reiterate our Buy rating,” he said.
On the general market position on US cannabis stocks, Atkinson said the larger US MSO’s are now at “value stock” multiple even though they tend to get traded “like high-growth, money-losing, high-beta stocks.”
“We believe this is partially due to lack of investor access (MSO stocks trade on the CSE or U.S. OTC exchanges), federal regulatory issues (restrictions on custody at certain U.S. prime brokers, self-imposed restrictions within more conservative investment firms), and/or above-average effective tax rates (due to federal tax clause 280E). Also, revenue and profit growth rates have been slowing down for the largest MSOs as they gain scale,” Atkinson said.