CGC - TerrAscend: No Magical Bullet But A Big Step (Rating Upgrade)

2023-06-22 17:43:56 ET

Summary

• TerrAscend Corp. obtained conditional approval for uplisting the cannabis stock to the Toronto Stock Exchange.
• The cannabis space continues looking for more access to capital and better valuations by uplisting to major stock exchanges.
• The stock is cheap at 2x sales targets, though not the cheapest in the cannabis space.

As with a lot of U.S. cannabis companies, TerrAscend Corp. ( TRSSF ) has worked aggressively, with a push from part-owner Canopy Growth Corporation ( CGC ), in order to uplist their stock to major stock exchanges. The multi-state operator (MSO) just got conditional approval for uplisting to the Toronto Stocks Exchange in an encouraging first sign. My investment thesis is Bullish on this MSO due to valuation and progress in the sector, though TerrAscend still isn't the favorite stock in the cannabis space.

Major Stock Exchange Uplisting

Due to operating in the cannabis space where plant-touching operations are illegal at the federal level, MSOs have been blocked from uplisting to major stock exchanges. Several MSOs have worked on plans to alter the corporate structure in order to obtain uplisting approvals with less regulatory hurdles from the TSX compared to the U.S. stock exchanges of the NYSE and Nasdaq.

On June 21, TerrAscend obtained conditional approval from the TSX. The company still has to meet closing requirements, but the move should occur. The bigger question is whether this matters much for U.S. investors considering the stock actually ended down on the day in what likely would be a ripping stock price on an uplisting to a major U.S. stock exchange.

Executive Chairman Jason Wild made this statement about the TSX listing on the Q1'23 earnings call prior to the recent conditional approval:

Just to be clear, we don't look at the TSX listing as a magic bullet. The capital markets have clearly been unkind to the cannabis space over the last two years. We do believe, however, that a well-run cash flow positive company can unlock substantially more value and significantly lower its cost of capital if listed on a major exchange with more participants. This is in my view, not only a great opportunity for TerrAscend, but also for other players in the industry, as our successful listing could blaze the trails for others to follow.

The company had to sell minimal shares and unloaded their HQ at a discount to meet the financial requirements to uplift to the TSX. TerrAscend sold $15 million worth of capital from private placements of equity and convertible debt while also selling their HQ in Canada for ~$15 million.

The stock has a listed market cap of nearly $600 million, so the capital raise isn't overly dilutive. Still, the fact TerrAscend needed to raise capital to just list on the TSX is not exactly ideal with the listing hopefully providing better stock prices.

The whole benefit of an equity uplisting to the major U.S. stock exchanges is access to cheaper capital and hopefully higher stock valuations. TerrAscend typically only trades less than 100K shares daily on the OTC, which is extremely low for a stock trading below $2.

The biggest catch is the corporate legal hurdles necessary to obtain the TSX approval and whether shareholders actually want this setup when voting at the annual meeting. TerrAscend plans to reorganize the business by severing the Canadian operations from the U.S. operations via exchangeable shares, with no voting rights until cannabis is federally legal in the U.S.

Improving Results

TerrAscend Corp. was long an overvalued stock due to the connection with a Canopy Growth position, but the company now produces the results to warrant the current stock price. The Q1'23 results saw revenue surge over 40% YoY to reach $69.4 million.

The MSO is now on a pace for nearly $300 million in annual revenues this year. Sure, a big revenue boost came from the AMMD deal adding an $8 million dispensary to the Maryland retail business, but TerrAscend was already reporting strong growth due to the expansion of recreational cannabis in New Jersey with the added boost of Maryland starting on July 1.

The addition of a new cultivation facility in Maryland along with 3 future stores in the state will contribute to strong growth in the next year. The uplisting to the TSX could help with M&A transactions in a very beaten down cannabis sector.

The biggest upside ultimately comes from the U.S. approving a version of the SAFE Banking Act. Senate Majority Leader Chuck Schumer (D-N.Y.) appears confident the bill will pass in the current session of Congress, though the market is highly skeptical.

Either way, TerrAscend and the whole MSO space has a couple of catalysts for the sector. The stock isn't the cheapest in the space trading at closer to 2x sales, but TerrAscend will rally with the cannabis sector on any positive developments.

Takeaway

The key investor takeaway is that TerrAscend is starting to see some tailwinds in the cannabis space after a brutal couple of years. Investors should use any weakness to buy this MSO stock for the potential catalysts of finally uplisting to major stock exchanges.

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