The MSO (multi-state operator) cannabis space is one area where investors can just about pick the stocks with darts, but TerrAscend (OTCQX:TRSSF) remains one stock to avoid. The company had miserable operations in 2021 and just recently closed the Gage Growth business to enter the tough Michigan market. My investment thesis remains Bearish on this stock, in part due to the Canopy Growth (CGC) investment.
While the company suggests continued momentum this year, all key financial metrics collapsed in the 2H of the year due to flower issues in the Pennsylvania market. TerrAscend saw the revenues and margins collapse during Q3’21 without any improvement in Q4.
The Q4’21 revenues were $49.2 million, which was flat with both the prior quarter and Q4’20 results. The company saw gross margins collapse in the year dipping to just 42.3% in Q4’21 from a high of 65.0% in Q1’21. Adjusted EBITDA fell over 50% during the last 2 quarters of the year to end the December quarter at only $11.9 million.
The company is very focused on brand sales, but the Gage Growth business brings a business with 11 open dispensaries and a plan to end the year with over 20 dispensaries in Michigan. The deal doesn’t appear to fit into the previous business model of TerrAscend where the company only owned 13 dispensaries in mid-March before the Gage deal closed.
When the deal closed, the worst part of the current business setup is that 16 of the 25 open dispensaries are in the highly competitive California and Michigan markets. The MSO has only small operations in limited license states such as Maryland and New Jersey.
The large Canadian cannabis company had made several investments in TerrAscend over the years. Similar to Acreage Holdings (OTCQX:ACRHF), the MSOs with contingent investments by Canopy Growth don’t appear to perform better than the sector.
Part of the problem is that TerrAscend has had a rotating door at CEO with Jason Ackerman stepping down a year ago with no replacement hired yet. The recent hiring of Ziad Ghanem was as President and COO while Jason Wild is still just the Executive Chairman leaving the company without a CEO.
With a big brother like Canopy Growth, the MSOs don’t appear to operate with the best efficiency likely due to the Canadian influencing decisions and slowing down decision making. The large Canadian cannabis company has a 20% contingent stake in TerrAscend.
The company suggests the share count is still only 318 million shares after closing the Gage Growth deal. The market value is ~$1.7 billion while the standalone TerrAscend business only generated $210 million in sales in 2021.
The Gage Growth business adds about $110 million in sales after reporting $27 million in sales for Q3’21 before closing the deal with 10 open dispensaries. The combined business adds up to ~$310 million in annual revenues before considering any growth in 2022. The reset of the Pennsylvania flower market, launch of recreational cannabis in New Jersey and additional dispensaries primarily in Michigan definitely provide catalysts for this year.
Analysts have 2022 revenue targets up at $478 million, but this target should fall much closer to $400 million due to the delay in New Jersey sales and the weak guidance for flat sales for the TerrAscend business in Q1’22. Analysts forecast Q1’22 revenues at ~$64 million and the company should only reach $55 million in sales from adding ~$6 million in sales from Gage Growth.
TerrAscend trades much closer to 4x sales targets for 2022, which is closer to the high end of most MSO stocks. The contingent investment by Canopy Growth has always left this stock trading at a premium valuation to the MSO group, yet the company doesn’t have the impressive operations to warrant such a premium. In addition, TerrAscend doesn’t have the most desirable operations with a larger portion of sales from California and Michigan in comparison to more attractive states like Maryland and New Jersey.
The key investor takeaway is that investors can find cheaper options in the U.S. MSO space. The stock will rally with the general space and Canopy Growth is likely to make a premium bid down the road, but all of the smaller MSOs are likely to see similar opportunities to cash out after the Federal government finally approves cannabis.