Ascend Wellness: New Jersey Boost, New York Disappointment

While the general cannabis sector has struggled to hit financial targets, Ascend Wellness Holdings (OTCQX:AAWH) just soared past Q2’22 targets. The MSO (multi-state operator) saw a huge boost from New Jersey, but the company had a huge disappointment in New York. My investment thesis remains ultra-Bullish on the under-the-radar cannabis stock, despite the disappointment.

Big Quarter

The MSO reported net revenues of $97.5 million, beating analyst targets by $6.8 million. Ascend Wellness is now on a path to annual revenues of $400 million before additional New Jersey stores open and the company completes acquisitions for new dispensaries/licenses in Illinois and Ohio for 5 more stores. The MSO ended the quarter with only 21 open stores.

Unlike other MSOs, Ascend Wellness is seeing outsized gains from New Jersey. A lot of the other MSOs involved in New Jersey have far bigger revenue bases, muting the impact of those additional recreational cannabis sales from just a couple of stores.

Ascend suggests the Rochelle Park store alone hit a weekly sales high of $1.21 million during the quarter. At $1 million in sales per week, the store alone would provide $52 million in annual sales. On the Q2’22 earnings call, CEO Abner Kurtin appeared to confirm these sales levels:

Moreover, we are very pleased with our initial transition to adult use in New Jersey. Our Rochelle Park store has been very successful. The store is now our number one store surpassing our $50 million revenue a year store in Collinsville, Illinois. We aren’t stopping here. We have significant continued upside in New Jersey. We expect to begin adult use sales at our Montclair, New Jersey store later this week, August 19th, subject to final approval by the town.

The MSO expects to open the Montclair store in New Jersey on August 19 followed by the Fort Lee store approval for recreational cannabis in the Fall. The New Jersey cannabis market still only has 27 stores open, with up to 10 of those limited to just medical cannabis, setting up any new stores for a flood of sales, at least in the short term.

While New Jersey is promising, Ascend has ended the pursuit of the New York assets from MedMen (OTCQB:MMNFF). Despite agreeing to terms in May, Ascend Wellness suggests the assets have deteriorated too much to complete the deal while the opportunity in New York has become less appealing due to social licenses and illicit sales.

Curaleaf (OTCPK:CURLF), the largest cannabis player in the world, still appears bullish on the opportunity in the New York market. New CEO Matt Darin shared this view on the Q2’22 earnings call:

We have some significant catalysts coming in the Northeast with the expected launch of adult-use in Connecticut and New York. We are preparing in advance for these opportunities and continue to invest in both states. We’ve seen strong momentum in Connecticut with 9% quarter-over-quarter growth versus Q1. And we are already the largest established player and the market leader in New York, which represents an estimated $4 billion market.

As Ascend wellness mentioned, the company now has $70 million in unencumbered cash to invest by choosing to bypass the MedMen NY opportunity, though it’s somewhat disappointing from the outside that the small MSO is losing access to such a big market. A lot of the social equity licenses to be handed out are likely to fail leaving the bigger MSOs controlling the market over the long term.

Discounted Value

The stock is cheap at a $450 million market cap with sales set to soar past $400 million this year. The MSO is in the works to add new dispensaries in Illinois and Ohio, in addition to the big boost from the eventual launch of 2 additional recreational cannabis stores in New Jersey. Sales could reach $550 million next year.

At those sales levels, easily hit on New Jersey sales boosts from 2 more recreational stores alone, Ascend Wellness will generate substantial EBITDA growth. The MSO reported a 21.4% EBITDA margin in Q2 alone. With a margin boost to just 25.0%, the MSO could reach $137.5 million in adjusted EBITDA in 2023 for a $450 million stock. Ascend Wellness can probably easily top this figure with all of the new stores and acquisitions adding to bases in states with existing operations.

Similar to a lot of cannabis stocks, Ascend Wellness isn’t priced for the prospects of the business. The company has cash of $140.6 million with net debt of $152.7 million.

The stock only trades at ~1x 2023 adjusted EBITDA targets, but the debt levels are always an issue in a developing market. Ascend Wellness could definitely fail to meet growth targets next year, making the debt position more precarious.

While the reduction of the $70 million cash payment for New York helps reduce cash outlays from pushing debt totals higher, the MSO still needs to invest in additional capacity expansion in states like New Jersey and Pennsylvania, amongst others.

Takeaway

The key investor takeaway is that Ascend Wellness is too cheap for the cannabis opportunity here. The market is overlooking the growing revenue base and the discounted value of the MSO stock. Not many stocks or sectors offer such opportunities to invest at 3x conservative EBITDA targets.