TerrAscend keeps Buy rating with Clarus

Cannabis stocks have pulled back sharply in recent trading sessions, but Clarus Securities analyst Noel Atkinson is sticking with a “Buy” rating on US multi-state operator TerrAscend Corp (TerrAscend Stock Quote, Charts, News, Analysts, Financials CSE:TER). Atkinson delivered an update to clients on Monday, saying movement on cannabis at the US federal level would be a watershed moment for stocks.

TerrAscend, a vertically-integrated cannabis company with production and retail operations in Pennsylvania, New Jersey, Maryland, Michigan and California, announced on Friday an arrangement with Canopy USA to convert C$125.5 million in aggregate loans plus interest in exchange for about 24.6 million exchangeable TER shares. Altogether after the new issuance, Canopy USA holds about 63.5 million exchangeable shares, about 22.5 million new warrants and about 1.1 million common shares. The deal has it that Canopy can convert the exchangeable shares to common shares subject to federal marijuana legalization in the United States.

“Canopy USA continues to be a trusted investor and partner. We thank them for their continued support as they increase their conditional ownership in the Company. This transaction, combined with the recent US$30 million pay down of our Michigan loan, materially improves our balance sheet and reduces annual interest expense by approximately $10 million,” said TerrAscend Executive Chairman Jason Wild in a press release.

Commenting on the news, Atkinson said it further asserts Canopy’s intention to bring TER into its empire, noting that Canopy took the exchangeable shares at a “massive” 107 per cent premium at C$5.10 per share. Atkinson said the deal, if and when legalization comes to pass, would give Canopy an 18.2 per cent stake in TER.

“Given what Canopy gave up (effectively taking shares at less than 50 cents on the dollar, given the implied premium, and no additional warrants) and doing it well ahead of maturity, we infer that Canopy wanted to bring TER more tightly into its portfolio even if its fully diluted stake is still far below a control stake (as compared to the conditional takeover deals Canopy USA has with [Wana, Jetty and Acreage]),” Atkinson said.

“The transaction lowers TER’s leverage, perhaps better preparing the Company for future acquisitions in neighbouring states such as Virginia, Connecticut, New York, or Massachusetts,” he wrote.

As to TerrAscend’s positives, Atkinson said the company has one of the highest levels of torque from the New Jersey market, with a concentrated portfolio and one of the largest retail and production footprints in the state. Atkinson said TER should also be one of the best-positioned operators in Maryland when that state launches adult-use sales.

With his “Buy” rating, Atkinson maintained a target price of C$3.00 per share, based on a 16x 2023 EV/Adjusted EBITDA multiple and implying a projected one-year return at the time of publication of 9.5 per cent. 

“We believe our target multiple is reasonable given recent price action for TER and the wider MSO/LP sector on excitement regarding potential changes to federal cannabis legislation/regulations, as well as our expectation for TER to achieve very strong revenue and Adj. EBITDA growth in 2023,” Atkinson said.