The stock has pulled back big time over the past year-and-a-half, but according to Beacon Securities analyst Russell Stanley that’s good news for investors looking to buy US cannabis name TerrAscend Corp (TerrAscend Stock Quote, Charts, News, Analysts, Financials CSE:TER). In a Thursday report to clients, Stanley moved his rating on TER from “Hold” to “Buy,” saying he’ll be looking for management to provide insight on its state-by-state operations in its upcoming third quarter commentary.
TerrAscend is a Toronto-headquartered company with vertically integrated operations in Pennsylvania, New Jersey, Michigan and California, along with licensed production in Mississauga, Ontario. The stock started dropping in early 2021 when the rest of the cannabis sector began losing ground, with TER going from a high of just under $20 to $7.70 by the end of 2021. TerrAscend shares have fallen further in 2022 and currently trade around the $2.00 mark.
Ahead of third quarter financials from the company, due on November 14 after market close, Stanley said he is estimating TER’s Q3 revenue to come in at $69 million compared to $65 for the previous quarter and adjusted EBITDA of $8 million compared to $6 million for the Q2. The consensus calls are for $72 million in revenue and $10 million in EBITDA.
More long-term, Stanley has lowered his 2023 revenue and EBITDA forecast from $403 million and $97 million, respectively, to $355 million and $77 million, respectively, to account for ongoing macroeconomic headwinds as well as competitive pressure TerrAscend is facing in Pennsylvania. The adjustments have caused Stanley’s target price to drop from C$3.50 per share to C$2.75, which at the time of publication represented a projected one-year return of 30 per cent.
On valuation, Stanley said he has TER trading at a premium to its peers due to the company’s strong acquisition potential.
“TER trades at 10.5x our revised F2023 adjusted EBITDA forecast. This represents a 60 per cent premium to the 6.6x average amongst CSE-listed US operators,” Stanley wrote. “Potential company-specific catalysts include the Q3 results on November 14, progress towards refinancing the Gage debt and further M&A activity.”
Stanley also commented on the latest news from Canadian licensed producer Canopy Growth, which announced plans to “fast-track entry” into the US cannabis market by exercising its options to acquire US company Acreage Holdings along with private companies Wana Brands and Jetty. Canopy has created a new holding company called Canopy USA which will hold the three US companies as well as its conditional ownership stake in TerrAscend. Canopy currently has 39 million exchangeable shares in TER, 22.5 million out-of-the-money warrants and 1.1 million options, together representing 17 per cent of TerrAscend’s fully diluted shares outstanding.
Stanley wrote, “We view this plan as confirmation of WEED’s commitment to entering the US market, and by extension, the potential for an acquisition of TER once federal regulations allow it.”