MSOS - Your Cannabis Portfolio Could Ascend With Ascend Wellness

2023-03-16 16:36:04 ET

Summary

• Ascend Wellness is a strong but cheap Tier 2 MSO.
• The company reported its Q4, which went okay, but the guidance for 2023 was below expectations.
• I think the stock could double over the balance of the year.

Ascend Wellness ( AAWH ) had a terrible 2022, but the stock is up from its all-time low in December. The company just reported its Q4, which was close to expectations, but it issued guidance for 2023 that was below what analysts had forecast. The 10-K was released after the market closed on 3/15, and I discuss 2022 and the outlook for 2023 and beyond from the release and the conference call.

The 2022 Disastrous Price Action

Ascend did not live up to its name in 2022, as the stock descended 82.5% to $1.15. The overall market as measured by the New Cannabis Ventures Global Cannabis Stock Index fell by 70.4% in 2022, while the New Cannabis Ventures American Cannabis Operator Index declined by 65.8%.

One big change for the company that investors had no way to anticipate was the departure of its CEO, founder Abner Kurtin, who was accused in Florida of a crime. The charge was dropped, but he moved to Executive Chairman, with two executives taking on the CEO role on an interim basis. The company is working with a major recruiting firm to name a new CEO.

During Q4, the company had been expected to generate revenue of $114 million and adjusted EBITDA of $29 million, but it fell slightly short. The press release indicated that sales expanded 27% to $112 million with adjusted EBITDA growing 43% to $28 million. There was a slide deck that management covered on the conference call .

For the year, Ascend grew revenue by 22% to $406 million. Adjusted EBITDA gained 17% to $93 million.

You can learn more about the company from their new investor presentation .

The 2023 Outlook

The company revealed that it expects revenue to increase 15% in 2023, which was lower than the 24% gain analysts had anticipated at $508 million. It expects similar growth in adjusted EBITDA, which the analysts had expected to grow 36% to $128 million. For the full year, the company is expecting to generate cash flow from its operations and to spend $25 million on capital expenditures as it builds out its New Jersey cultivation facility and adds dispensaries. The company today has 26 operating dispensaries, and it projects that it will be operating 39 in 7 states in mid-2024.

There aren't yet complete updates to the consensus, but assuming 15% sales growth, revenue would grow to $467 million. Adjusted EBITDA at the same margin of 23% would be $107 million.

Valuation

I had a target based on previous projections of adjusted EBITDA of $155 million for 2024 at $2.79 for year-end (enterprise value of 5X, which is very low in my view). I am refining the 2024 adjusted EBITDA that I expect to be $134 million (20% revenue growth and a margin of 24%). Applying the same low multiple of 5X and adjusting for net debt of $233 million yields a new target for year-end of $2.24. Again, my multiple of 5X may be too low, as several peers currently trade higher in 2023.

I have expressed concern about AdvisorShares Pure US Cannabis ETF ( MSOS ) facing potential liquidation of its holdings if it keeps seeing redemptions. Investors should be aware that AAWH is not held by MSOS.

Conclusion

I think cannabis stocks are very attractive at this time, though I am not sensing that it is time for the new rally to begin. In fact, the Global Cannabis Stock Index posted an all-time low this week.

For investors interested in cannabis companies, I don't think that Ascend Wellness is the cheapest, but it is cheap in my view. Importantly, it is growing still and doesn't face any near-term debt maturities. I like that it is in just a few states currently and can expand into new ones, which is not as true for the larger operators.

In my view, the outlook for 2023, lower than expected, is still solid, and I like the company proactively guiding to run the business to be more focused on cash flow. Neither Green Thumb Industries ( GTBIF ) or Trulieve ( TCNNF ) offered guidance for 2023 at all, but analysts chopped their estimates. GTI is expected to see revenue grow just 8% and adjusted EBITDA just 9%, while Trulieve is expected to see revenue decline 1% and adjusted EBITDA to drop 7%. Ascend is expected to grow faster and is cheaper. I like the stock at $1.15, where it ended the day trading and where it ended 2022.

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