Russell Stanley of Beacon Securities is actively keeping an eye on Ascend Wellness Holdings (Ascend Wellness Stock Quote, Chart, News CSE:AAWH). Despite maintaining a “Buy” rating for the company, he lowered his target price from $15/share target price to $12.50/share for an implied return of 286 per cent in an update to clients on Monday.
Founded in 2018 and headquartered in Boston, Mass., Ascend Wellness is a vertically integrated MSO that produces and distributes medical and adult-use cannabis products in the United States, with operations or interests in Illinois, Massachusetts, Michigan, New Jersey and Ohio. The company also produces and distributes Ozone branded products.
The target drop comes as Stanley revised his expectations regarding Ascend’s operations in Illinois for this year, with particular attention paid to ongoing legal battles pertaining to the release of 185 additional licenses in the state on top of the approximately 110 retail outlets already operating in the state.
“We view the release/development of those licenses as a major growth catalyst for IL’s addressable wholesale market, but recent media reports and MSO commentary indicate that the legal battles will likely persist longer than we originally assumed,” Stanley said.
However, Stanley notes that Ascend is working to offset the ongoing Illinois issue through the acquisition and integration of Story of PA, along with all its existing members in a roll-up transaction. Notably, Story of PA holds a clinical registrant license, which in addition to allowing six dispensaries to open, also permits the holder to develop 100,000 square feet of cultivation and manufacturing space.
The transaction carries a $53 million price tag, with $10 million paid out in cash and the remainder coming in stock.
Stanley expects the first two dispensaries in the agreement to open in Scranton and Wayne in the opening quarter of 2023, with the remaining four dispensaries expected to open in the Philadelphia and Pittsburgh regions by the third quarter of 2023.
“We are pleased to expand into Pennsylvania through our investment in Story and help Story introduce an elevated retail experience and best-in-class products to a market of 13 million people,” said Abner Kurtin, Founder, and CEO of Ascend Wellness in the company’s April 20 press release. “Story’s clinical registrant operations will bring the AWH family of companies and our products into our sixth state in the Northeast and Midwest region and represents another step toward AWH being one of the top MSOs serving this part of the country exclusively.”
In addition to the Pennsylvania expansion, Ascend has also started planting its roots in New Jersey, having recently begun adult-use sales in its Rochelle Park medical dispensary, with plans to develop locations in Fort Lee and Montclair to satisfy its three-license maximum in the state, pending regulatory approval.
“Ascend Rochelle Park has served thousands of New Jersey medical patients since opening last year,” said Chris Melillo, Chief Revenue Officer of Ascend Wellness in an April 21 release. “Existing patients can rest assured that they remain a priority and will continue to enjoy our top-tier services without disruption as we welcome adult-use consumers to the New Jersey Ascend community. We are excited to serve all New Jersey cannabis consumers and look forward to commencing recreational sales in our other locations across the Garden State.”
With first quarter results from the 2022 fiscal year expected to come on May 11, Stanley is forecasting $86 million in revenue, which is in line with the consensus estimate of $87 million. Overall, Stanley projects revenue for 2022 to come in at $425 million for a potential year-over-year increase of 28 per cent. Looking ahead to 2023, Stanley forecasts a significant jump in revenue to $650 million for a potential year-over-year increase of 52.9 per cent.
From a valuation perspective, Stanley forecasts the company’s EV/Revenue multiple to drop from the reported 2.2x in 2021 to a projected 1.7x in 2022, then to a projected 1.1x in 2023.
Meanwhile, after reporting $79 million and an implied margin of 23.8 per cent in 2021, Stanley forecasts a widening of the margin in 2022, with the $106 million adjusted EBITDA projection implying a margin of 24.9 per cent. In 2023, Stanley forecasts adjusted EBITDA to rise to $211 million to imply a margin of 32.5 per cent.
In terms of valuation, Stanley projects the company’s EV/adjusted EBITDA multiple to drop from the reported 9.2x in 2021 to a projected 6.9x in 2021, then to a projected 3.5x in 2023.
Ascend’s stock price has done exactly the opposite to begin 2022, descending 49.7 per cent since the start of the year after starting the year at $6.18/share, with its present price of $3.11/share representing its low point for the year to date.