Fourth quarter results came in lower than expected for licensed cannabis producer CannTrust Holdings Inc. (TSX:TRST), but analyst Martin Landry of GMP Securities says issues with production costs and capacity constraints are temporary problems. In a note to clients on Monday, the analyst maintains his “Buy” rating with a lowered target price of $17.00.
Vaughan, Ontario’s CannTrust released its Q4 and year-end financials last week, boasting record revenues which grew to $7.0 million and $20.7 for the quarter and year, respectively, compared to $2.1 million and $4.4 million, respectively, in 2016.
“We continued to experience dynamic growth in all areas of the Company as we execute our business plan aimed at being a market leader and innovator in the development of products and services to better serve our patients and physicians and to position us for the pending legislation to legalize the adult consumer recreational use of cannabis,” said CEO Eric Paul in a press release.
At the same time, the company’s Q4 EBITDA was a negative $0.5 million, which compared to Landry’s expectation of positive $0.8 million.
“The main disappointment came from production costs per gram, which increased significantly as some grow rooms in the Vaughan facility were dedicated to providing the Niagara facility with seedlings instead of producing sellable products,” says the analyst. “In addition, the company purchased third party products to bridge the demand gap as the Vaughan facility was capacity constrained, creating a $1.8m headwind.”
But Landry sees these problems as temporary, with the company returning to profitability by Q2. The analyst notes that CannTrust has been one of only four public companies to generate positive EBTIDA over the last 12 months, thanks to industry-leading yields and low production costs.
“We are reducing our FY18 forecasts to reflect a slightly later starting date for the recreational market (September 1st vs July 1st previously). This has a material impact on our FY18 revenues and EBITDA but a limited impact on our FY19 estimates,” says the analyst. “Aside from the change in timing of the recreational market opening, we have kept mostly similar production costs and profitability estimates, as we believe that the Q4/17 issues incurred by the company are temporary,” he says.
The analyst predicts TRST will produce revenue and EBITDA in FY18 of $88.2 million and $26.0 million, respectively, which will increase to $241.4 million and $78.1 million, respectively, in 2019.
Landry estimates that CannTrust trades at 10x forward EV/EBITDA, which is a discount of about 55 per cent compared to its peers. The $16.00 target price represents a potential return on investment of 103 per cent at the time of publication.