ERP Implementation And Ohio Expansion Will Improve Operational Efficiency

Key Takeaways

• Strategic expansions into new markets like Ohio and New Jersey are poised to enhance revenue and profitability through streamlined operations and vertical integration.
  
• Increased cultivation capacity and product diversification aim to boost market share by aligning with consumer preferences and capitalizing on legislative developments.
  
• Dependence on M&A growth and regulatory uncertainties pose significant risks to TerrAscend's revenue and profitability despite cash flow positivity.

Catalysts

TerrAscend Corp. cultivates, produces, and sells medical and adult use cannabis in Canada and the United States.

• TerrAscend's implementation of a company-wide ERP system is expected to enhance operational efficiency and data visibility, which should lead to a reduction of at least $10 million in SG&A in 2025. This is likely to impact net margins positively through cost optimization.
  
• The entry into Ohio, anticipated through the acquisition of high-performing stores, aims to leverage existing infrastructure, particularly in Michigan. This strategic expansion could drive revenue growth and profitability as operations in the Midwest are streamlined.
  
• The expansion plans in New Jersey, including acquiring up to 7 additional diversely owned dispensaries under social equity-focused legislation, aim to increase market leadership. This expansion is expected to improve revenue and net margins through vertical integration.
  
• Increased cultivation capacity in Maryland and New Jersey, alongside diversification into new product types such as edibles, chocolate, and new flower strains, are expected to boost revenue. These initiatives should enable improved profitability by catering to consumer preferences and increasing market share.
  
• The possibility of Pennsylvania passing an adult-use cannabis bill represents a significant growth opportunity. Full utilization of TerrAscend's large-scale facility without additional CapEx could substantially increase revenue and net margins once adult-use legalization occurs.

TerrAscend Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TerrAscend's revenue will grow by 4.7% annually over the next 3 years.
• Analysts are not forecasting that TerrAscend will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate TerrAscend's profit margin will increase from -26.2% to the average CA Pharmaceuticals industry of 1.1% in 3 years.
• If TerrAscend's profit margin were to converge on the industry average, you could expect earnings to reach $3.7 million (and earnings per share of $0.01) by about April 2028, up from $-80.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 186.5x on those 2028 earnings, up from -1.0x today. This future PE is greater than the current PE for the CA Pharmaceuticals industry at 18.0x.
• Analysts expect the number of shares outstanding to grow by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.94%, as per the Simply Wall St company report.

TerrAscend Future Earnings Per Share Growth

Risks

• The company's reliance on M&A for growth, along with aggressive pursuit of these opportunities, carries execution risk, which may lead to costly transactions if not effectively managed, impacting net margins and ultimately earnings.
  
• Declines in retail sales in Michigan and New Jersey highlight potential challenges in sustaining revenue growth, particularly if similar trends emerge in other markets or persist longer than anticipated.
  
• The cannabis industry is subject to regulatory uncertainty at both state and federal levels, which could impact strategic initiatives like Pennsylvania's potential adult-use legalization, affecting future revenue streams.
  
• Despite a positive cash flow and reduced operating expenses, the presence of noncash impairment charges, particularly in the Michigan business, underscores existing risks that could impact asset valuation and future profitability.
  
• The anticipated integration and efficiency gains from the ERP system might not fully materialize, which could limit the expected G&A expense reductions and ultimately affect net margin improvements.

Valuation

• The analysts have a consensus price target of CA$2.101 for TerrAscend based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$2.52, and the most bearish reporting a price target of just CA$1.51.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $351.8 million, earnings will come to $3.7 million, and it would be trading on a PE ratio of 186.5x, assuming you use a discount rate of 7.9%.
• Given the current share price of CA$0.38, the analyst price target of CA$2.1 is 82.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.