CannTrust Holdings is undervalued, GMP Securities says

With recreational marijuana still yet to become a reality in Canada, it’s not easy picking the winners from the herd of contenders, but CannTrust Holdings (CSE:TRST) stands out, says GMP Securities analyst Martin Landry, with reason number one being that TRST has proven to be profitable.

“CannTrust has been one of only four public licensed producers to generate positive EBITDA in the last 12 months,” says Landry in a coverage launch on January 30.

“This stems from the company’s impressive yields, 60-80% higher than the average, low production costs (third highest adjusted gross margin) and SG&A expenses of ~5$/gram, the second lowest amongst public peers. We expect efficiency and scale to improve these metrics considerably this year with production from the large greenhouse.”

The four-year-old company has indoor growing facilities in Vaughan, Ontario, and a greenhouse on 46 acres in the Niagara region and has rapidly scaled up over the past year, jumping from just three per cent of the Canadian medical marijuana market in Q3 of 2016 to ten per cent in Q3 2017.

And while branching out to the recreational market once it’s established is clearly in the works for CannTrust, Landry likes the company’s position within the medical pot space, where CannTrust has a partnership with Apotex, the largest generic pharmaceutical manufacturer in the country.

“In our view, the domestic medical cannabis market could be less competitive and generate higher profitability levels than the recreational market,” says the analyst.

Like the rest of Canada’s pot stocks, CannTrust took a tumble over the past two weeks, going from a high of $12.58 on January 24 down to the mid-$8 range since early February.

“CannTrust appears undervalued relative to the nine largest public licensed producers, which trade at 28x CY19 EV/EBITDA. With a trading multiple of 13x CY19 EV/EBITDA, CannTrust trades at a discount of ~55% to the group,” says the analyst. “We feel this discount is unwarranted given the profitability level of the company and the potential upside of the Apotex partnership.”

Landry’ last week initiated coverage of CannTrust with a “Buy” rating and a target price of $17.00, representing a 56.7 per cent return at time of publication.