TerrAscend has lots of upside from current levels, says Clarus

Cannabis company TerrAscend Corp (TerrAscend Corp Stock Quote, Charts, News, Analysts, Financials CSE:TER) is ready to put the pedal to the metal in New Jersey now that the state has approved TER and six other retailers for adult use cannabis sales. Commenting on the company is Clarus Securities analyst Noel Atkinson who in an update to clients on Tuesday reiterated his “Buy” rating and C$11.00 target price on the stock.

TerrAscend is a multi-state operator in the US cannabis space with vertically integrated production and retail in Pennsylvania, New Jersey, Maryland, Michigan and California. The company also has licensed production assets in Canada, making it one of the few companies with revenues in both the US and Canada, although over 90 per cent of its revenue comes from the US.

Atkinson’s report comes after news on Monday that New Jersey’s Cannabis Regulatory Commission (CRC) approved seven medical pot suppliers to start selling adult use cannabis, the event coming almost a year and a half after New Jersey voters came down in favour of legalizing rec pot for the state. The retailers will now have to complete an operational assessment and pay the license fee before starting sales, which should happen in a few weeks, says Atkinson.

“TerrAscend has two dispensaries open in northern NJ (Phillipsburg and Maplewood) and its Lodi location should be opening very shortly. All three locations are already municipally approved for adult-use sales, which is not the case for some other operators,” Atkinson wrote.

The analyst said TerrAscend is calling for $40 million per year in revenues from each of its New Jersey stores during the initial peak period, while competition will remain limited over the first 12 to 18 months, making for a ripe environment for TER. As well, Atkinson said the company is expected to conduct wholesale operations to other adult-use retailers starting right away as it has one of the largest production facilities in the state and has been stockpiling inventory for months.

“The NJ CRC now estimates that the state will have 100,000-200,000 pounds (45-90 million grams) of annual excess demand, which should support strong pricing and healthy gross margins,” he said.

Atkinson has made a few tweaks to his estimates on TER due to the New Jersey news along with TerrAscend’s recent announcement of a pending acquisition of its first dispensary in Maryland, which Atkinson has initially pegged at generating about $5 million per year in revenues.

For 2022, Atkinson is calling for TER to generate $393.3 million in revenue and $116.5 million in adjusted EBITDA. For 2023, he is calling for $628.0 million in revenue and $223.9 million in adjusted EBITDA. (All figures in US dollars except where noted otherwise.)

“We believe TER will achieve one of the fastest revenue growth rates of any larger US MSO during 2022e and 2023e, thanks to its Mid-Atlantic and Michigan operations,” Atkinson said.

On comps, Atkinson has TerrAscend at a 10.3x multiple based on 2023’s EV/adjusted EBITDA versus the average among its comparable US cannabis peers at 6.0x.

“Given that the recent Gage acquisition and the New Jersey adult-use expansion will only contribute for part of 2022, we focus on 2023 for valuation analysis. 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,” Atkinson wrote.

“We also expect TER to achieve 60 per cent year-over-year organic revenue growth in 2023 as well as 92 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.

At press time, Atkinson’s maintained $11.00 target represented a projected one-year return of 51.7 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,” Atkinson said.

TerrAscend announced on Monday the definitive agreement to acquire the Allegany Medical Marijuana Dispensary (AMMD), a retail outlet in Maryland from Moose Curve Holdings, with the deal price of $10 million in cash. 

TerrAscend said AMMD has built a strong and loyal customer base in Northwestern Maryland, with TER aiming to rebrand the store under its Apothecarium banner.

“Our Maryland strategy is coming together nicely,” said Jason Wild, Executive Chairman of TerrAscend, in a press release. ”When we entered the state, we planned to significantly expand our cultivation and manufacturing capacity, in addition to vertically integrating. One year later we have made significant progress, with the buildout of our 160,000 square foot facility and our acquisition of this high performing medical dispensary.”