While other cannabis companies have been grabbing the headlines, TerrAscend (TRSSF) has been quietly building itself into a serious contender in the industry. The company has gotten off to a better start in 2020 after posting a series of charges in its 2019 year-end numbers related to its Ilera Healthcare division, as it redeems itself among analysts.
The fourth-quarter net loss was a staggering $127 million. The company said that the change in adjusted earnings before interest, taxes, depreciation and amortization -- compared to the prior year period -- was primarily driven by a decline in Canadian cannabis revenues. Those lower revenues were a result of ongoing demand issues. While the net losses haven't completely disappeared, it seems the company is on track to turn things around this year.
TerrAscend is best known for its Apothecarium brand of dispensaries in California, but it turns out that Pennsylvania has been a sleeper hit.
The company reported total revenues for the first quarter of $34.8 million, an increase of 34% sequentially. Most of the growth was driven by the Ilera Healthcare business unit in Pennsylvania. TerrAscend tripled the production capacity in the state and it is exploring an additional 15% expansion of its production capacity in the state.
"We believe Ilera has the potential to drive at C$150-175 million a year of revenue without further expansion of its product facility in Waterfall, PA," wrote Clarus Securities analyst Noel Atkinson. That's about $111 million to $129 million in U.S. dollars.
The company also said that it expects in the second quarter it will see an additional 30% growth in revenue to approximately $33 million and that it will be driven primarily by the operations in Pennsylvania. The company did this off of one dispensary in Plymouth Meeting, Pa., and has just opened another in Lancaster and has plans for one more in that specific region. The company is limited to three stores for this license according to the rules in the state, but could acquire another license.
TerrAscend is continuing new store openings in California, as well as following the successful acquisition of The Apothecarium in San Francisco. Another is planned for Berkeley, where it will be one of only seven dispensaries allowed in the city. It will also be one of the closest to the University of California-Berkeley campus. TerrAscend has also leased a retail spot in Oxnard, Calif., as it pursues a license there as the company works its way south down the state.
This leaves New Jersey in the portfolio. The Philipsburg store in northwestern New jersey will be its first in the Garden State and the first in Warren County. If New Jersey legalizes recreational marijuana in the fall, the company could open additional stores. Management has said it has one potential location locked up and is working on a third. Analysts are planning on a new store in the first quarter of 2021 and third in the second quarter.
Analysts Putting TerrAscend on Radar
Analysts for multi-state operator TerrAscend seemed somewhat surprised with the company's first quarter 2020 earnings last week, as it hit a home run in the state of Pennsylvania.
AltaCorp Capital analyst Kenric Tyghe wrote in a report dated May 25, "We believe that the option value of recreational cannabis legalization in New Jersey in 2020e and the possibility of Pennsylvania in 2022e represent material potential positive catalysts to both earnings trajectory, earnings visibility and the imputed multiple expansion that a step change in these metrics supports through our forecast window."
He has an Outperform rating and a 12-month target price of about $5.92, which he believes is conservative. Tyghe said he thinks TerrAscend is on the right side of the curve and well positioned to become a market leader.
Clarus Securities analyst Atkinson set his target price at about $6.47 and has a Buy rating on the company. He says 2020 will be a transformational year for the company.
"This year should be a watershed year for TerrAscend's U.S. operations, given the combination of Ilera's expansion in Pennsylvania, the expected launch of operations in New Jersey and the new store openings in California. We believe TerrAscend remains positioned to be one of the highest-margin MSOs in the U.S. and to quickly achieve free cash flow."
Stifel analyst Robert Fagan has a Buy rating on the company and a target price of around $4.44.
"After a kitchen sink style quarter in Q4, TER's Q1 EBITDA surprise and solid Q2 guidance suggest the company's growth and profit momentum have rapidly turned the corner," wrote Fagan, noting that the company's margins compare favorably with the majority of its peers.
Looking Ahead
The company's net losses in 2019 were about $159 million, but they are expected to drop down to about $17 million in 2020. Its Canadian businesses look to be a weak spot, but improving. The company ended the quarter with about $23 million in cash and JW Asset Management has reaffirmed its commitment by leading a $37 million convertible preferred share offering. The stock has lifted from a low of $1.33 in March to lately trading at $2.26.
It seems TerrAscend is making a quick comeback and getting on analysts radar.
