AAWH - Ascend Wellness: Thriving Without New York

Summary

• Ascend Wellness agreed to a deal to enter the Maryland cannabis market the cheap.
• The small MSO is already producing over $110 million in quarterly sales despite cancelling a deal to enter New York.
• The stock is cheap trading at only 2x adjusted EBITDA targets.

After ending a once promising deal to enter the massive New York cannabis market, Ascend Wellness Holdings ( AAWH ) is thriving due to not entering the New York market. The small MSO is now free to enter more appealing state markets and expand coverage in existing markets. My investment thesis is ultra Bullish on the small MSO with the market completely overlooking the cannabis opportunity.

Maryland Entry

In the course of a year, the Maryland market is probably far more appealing than the New York market. At one point, the New York cannabis market promised a massive $5 billion total market size, but the regulatory environment shifted to favor social licenses versus established MSOs with existing medical licenses.

Ascend Wellness ended up terminating the MedMen NY ( MMNFF ) deal and has now entered a deal to acquire Devi Holdings for just $19 million. The deal brings four licensed dispensaries in Maryland, bringing their total to 28 stores in 7 states with limited licenses.

Due to the sharp declines in cannabis assets, Ascend Wellness was able to buy the Maryland business that already has a $17 million sales run rate for only $19 million. The deal for Devi even includes up to $3 million of real estate assets. Ascend Wellness only has to pay $12 million in cash and 5.19 million shares to satisfy the additional $7 million payment.

The Maryland market is set to top $1 billion in sales with the approval of recreational sales. The market is estimated to have a robust medical cannabis market approaching $725 million in 2022 sales.

Ascend Wellness could push annual sales to ~$29 million by achieving the 4% market share represented by their share of open dispensaries.

Surprisingly Big

Not long ago, Ascend Wellness was an afterthought in the MSO space. Now, the company is reporting quarterly sales topping $110 million and still in expansion mode.

Ascend opened the 3rd New Jersey store in mid-November, providing a major avenue for growth. The Fort Lee store is the closest recreational cannabis store in New Jersey to the New York border and the complete failure of the New York regulators to open up the recreational cannabis market should provide this store with an opportunity to match the sales volume of their first New Jersey store.

The Fort Lee store has a massive 4,000 sq. ft. space with 45 parking spaces. The Rochelle Park store is running some $55 to $60 million in annual sales now. The management team was reticent to project a similar revenue total, but this comment by the CEO on the Q3'22 earnings call appears to suggest the Fort Lee store won't be far from this revenue total:

I think that's what's driven Rochelle Park to be the $55 million, $60 million kind of store that it is. And I think that will work in our favor in Fort Lee. And I think Dan's reluctance to project is just as you said, Rochelle Park is just a huge number like, we don't sit here and project $55 million stores. I mean, we thank the Lord if we get them, but we don't expect.

The market cap sits at only $250 million, even with the 5 million shares for the Maryland deal. The MSO is forecast to top $500 million in revenues this year and already produces an annualized rate of adjusted EBITDA topping $111 million or ~2x EBITDA.

The Maryland acquisition should boost the 2023 targets for an already exceptionally cheap stock. The MSO has ~$128 million in net debt already, but the company is now focused on cash generating limiting in further build to the debt position. Regardless, the stock hasn't rallied any despite the improving results in a tough retail environment.

Takeaway

The key investor takeaway is that Ascend Wellness is another exceptionally cheap U.S. cannabis stock. Investors should use weakness to continue building positions in this beaten down sector, but capital returns aren't guaranteed.

For further details see: