CannTrust Holdings has a 29 per cent upside, Canaccord Genuity says

With its growing medical customer base and shrinking production costs, licensed producer CannTrust Holdings (CannTrust Holdings Stock Quote, Chart, News: TSX:TRST) should be trading in line with the larger players in the cannabis space, according to Neil Maruoka of Canaccord Genuity. The analyst reiterated his “Speculative Buy” rating on Wednesday with a raised price target of $12.50.

Vaughan, Ontario-based CannTrust announced its Q1 financials for the period ended March 31, 2018, on Wednesday, featuring revenues of $7.8 million, a 158 per cent increase over Q1/17, and an Adj. EBITDA of negative $1.4 million. The company saw active patients increase to more than 42,000 over the quarter, a 194 per cent uptick from Q1/17, while launching three different formats of cannabis oil capsules.

Maruoka says there are a number of elements that are working in CannTrust’s favour: the company reported cannabis and oil extract sales representing around 60 per cent of its revenues in comparison to the industry average of 20 per cent; they are expecting to expand production capacity from 25,000 kg to 50,000 kg over the coming months; their 42,000 active patients represents a strong and growing market share; and their production costs are heading south, leading to margin expansion.

“CannTrust reported Q1 results that were generally in line with our forecasts,” says the analyst in a client note. “More importantly, the company reported steady and improving operating metrics, underscoring the stability of its business.”

“With industry consolidation again in focus following Aurora’s proposed acquisition of MedReleaf, we believe that CannTrust represents an upper-tier producer with solid execution and significant capacity set to come on line in coming months,” he says. “Based on the company’s funded capacity, low-cost production, leading growth profile, and forecast superior margins, we believe that CannTrust deserves to trade in line with the larger players in the space.”

Maruoka has upped his revenue and Adj. EBITDA estimates for 2018 to $55 million (was $50 million) and $6.8 million (was $6.4 million), respectively, and his revenue and Adj. EBITDA estimates for 2019 to $106 million (was $99 million) and $27.5 million, respectively.

The analyst sees TRST currently trading at 14.8x two-year forward EV/EBITDA which compares to the industry average of 13.2x and to the company’s large cap peers at 19.7x. The analyst’s revised target of $12.50 represents a funded capacity multiple of 19.3x.

The $12.50 (was $9.50) target represents a projected return of 29 per cent at the time of publication.

Disclosure: Jayson MacLean owns shares of CannTrust Holdings.