Proactive Investors - Stifel GMP analysts are impressed by the attractive valuation Terrascend Corp (CSE:TER) is paying for Peninsula Alternative Health, which operates a single medical cannabis store in Maryland, ahead of the state’s move to legalized the recreational use of cannabis on July 1, which they believe has the potential to double the size of the Maryland's market in the first year.
In a note to clients, the analysts wrote that the $22.1 million purchase price, which is composed of $1.5 million cash at closing and an undisclosed distribution between assumed debt, sellers notes and shares, could result in an outsized accretion of 20%-25% despite it being a simple 1-store tuck-in, “demonstrating strong torque due to the company's relatively smaller size”.
“In addition, with management's ongoing intentions to add another 2 stores to reach its 4-store cap, there could be further upside ahead,” they wrote.
The analysts at Stifel noted TerrAscend management indicated that Peninsula generates 2023 run-rate revenues of $14 million and the acquisition is immediately accretive on an earnings before interest, taxes, depreciation and amortization (EBITDA) and cash-flow basis.
As well, management thinks Peninsula could be one of its highest grossing stores in a recreational market given the limited competition.
Overall, the analysts are positive on TerrAscend due to the company's focus on profitability, with management achieving record EBITDA margins in line with larger senior peers, in addition to the relative financial certainty afforded to the company through the resources of its chairman and executive chairman, which “provide a sustainable competitive advantage” in the current challenging cannabis business environment.
Stifel analysts have a target price of C$4.50 per share on TerrAscend stock, which implies more than 100% upside from its current share value of $2.17.