Initiating Coverage on TerrAscend

By Bill McNarland On Jun 26, 2024

We are initiating coverage on TerrAscend with a “Buy” due to its strong financial performance and leading revenue growth compared to its peers. The company’s effective cost management and significant gross profit margin improvement support sustained profitability. Additionally, potential federal cannabis rescheduling could reduce tax burdens and open new market opportunities, driving future growth.

Blended Pre and Post 280E Fair Value: $3.76
Expected 1-Year Return: 166%
Estimated 2024 FY Revenue: $342M
Estimated 2024 EBITDA: $63.27M

Strengths of TerrAscend Compared to Its Peers

TerrAscend leads in revenue growth, demonstrating its competitiveness and potential for profitability. The company’s strong and improving gross profit margins reflect effective cost control and operational efficiency. Its lower SG&A margin highlights superior cost efficiency and effective management of expenses, positively affecting net income. Compared to its peers, TerrAscend uses less leverage, indicating a conservative financial strategy and slower liability growth. In 2023, TerrAscend became the first U.S. plant-touching cannabis operator to list on the Toronto Stock Exchange (TSX), providing access to institutional investors previously restricted from non-major exchange-listed companies.

Weaknesses of TerrAscend Compared to Its Peers

TerrAscend’s current ratio is below the industry median and is a focus, with $120M of debt maturing by Q4 2024. CFO Keith Stauffer noted in a May 9th, 2024, analyst call that the company is exploring various financing structures to secure the lowest possible cost of capital. When this is refinanced, the current ratio will return to normal.

Our Forecasts

We initiate our coverage with a “Buy” rating for TerrAscend, focusing on its robust financial health and significant growth potential. We employ three primary valuation methods—Discounted Cash Flow (DCF) growth, DCF revenue, and EV/Revenue—to offer a comprehensive estimate of the company’s value. These methods are adjusted for the anticipated benefits of eliminating 280E taxes. We estimate a fair value of $3.76 per share, indicating a 166% upside from the current price. This valuation incorporates TerrAscend’s strong revenue and cash flow growth and considers potential positive impacts from expected regulatory changes in the cannabis industry.