Needham Analysts Laud This Cannabis Giant's Growth, Eyeing Solid 4Q For TerrAscend

TerrAscend Corp. TSNDF displayed significant growth in the third quarter, with expectations of maintaining this momentum into the fourth quarter. This growth is attributed primarily to the adult-use conversion in Maryland and increased efficiency, leading to an improvement in EBITDA margins. In a recent note, Needham analysts Matt McGinley and Chad Britnell broke down the earnings report.

Strong Financial Performance In 3Q

TerrAscend's revenue saw a notable increase, growing 24% quarter-over-quarter and 35% year-over-year, reaching $89.2 million. This surpasses the consensus estimate of $82.6 million.

Growth was driven by the acquisition and conversion of Maryland assets to adult use legalization, along with a rise in wholesale revenue in New Jersey and Pennsylvania. The gross margin improved to 53.3%, exceeding the consensus of 50%, propelled by sales leverage and efficiency gains.

Needham analysts applauded TerrAscend's strategic moves, emphasizing how the company's effective operational realignment has been instrumental in driving its financial upturn. Their analysis pointed to TerrAscend's adept handling of market challenges and opportunities, particularly through strategic acquisitions, as a key factor in its remarkable revenue growth.

Looking Ahead: 4Q Projections And Operational Focus

TerrAscend has revised its full-year sales guidance, indicating a consistent revenue stream from the third to the fourth quarter. The company also raised its 2023 EBITDA guidance by $10 million, reflecting a 9-point improvement in EBITDA margins.

With a 40% reduction in debt and a 30% decrease in interest expenses, the company's financial health appears robust. Terrascend is now focusing on acquiring assets to scale operations in existing states, with New Jersey retail partnerships being a key priority.

Reflecting on this positive trajectory, Needham forecasts sustained financial stability for TerrAscend. The analysts highlighted the company’s strategic financial management, including significant debt reduction, as vital factors that position it for a robust cash flow and steady revenue in the upcoming quarter.

Analyst Perspectives and Market Positioning

In the research note, Needham analysts highlighted TerrAscend's narrowed but deep footprint in the cannabis market, noting the potential for growth in wholesale and retail joint ventures, especially in New Jersey and Maryland.

While acknowledging the competitive challenges in Michigan and the reduced wholesale market in Pennsylvania, they see opportunities for growth through acquisitions and operational efficiency improvements.

Valuation and Risks

TerrAscend's stock is currently rated as a "Hold," trading at an EV/EBITDA premium compared to its peers. This reflects expectations for full-year benefits from New Jersey assets and contributions from the Maryland adult-use market in 2023 and 2024.

However, risks such as expansion into new markets, regulatory challenges and pricing dynamics in the U.S. cannabis industry could impact future growth and valuation.

TerrAscend's third-quarter performance signifies a notable improvement in revenue and margins, setting a positive trajectory for the company. While they face challenges in market dynamics and regulatory landscapes, their strategic focus and operational efficiency present a promising outlook for continued growth.

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