A new $100-million dollar bought deal has increased Echelon Wealth Partners analyst Russell Stanley’s confidence in CannTrust Holdings (TSX:TRST).
In a research update to clients Tuesday, Stanley maintained his “Top Pick” and “Speculative Buy” ratings on TRST and increased his 12-month target price from $18.50 to $21.00, implying a return of 142 per cent at the time of publication.
On Tuesday, CannTrust announced it had closed a bought deal financing valued at $100.4-million by selling 11.15-million shares ar $9.00.
Stanley explained how this development changed his target.
“The Company announced the closing of its $100.4M bought deal prospectus offering at $9.00/unit, and separately announced that its partner NexgenRx has secured its first plan sponsor to include cannabis as a benefit under its patient plan,” the analyst noted. “We have revised our estimates to reflect the financing and the indicated use of proceeds. We have also increased the valuation multiple we use to 17.5x EV/2019E EBITDA from 16x, which still reflects a 44% discount to the average multiple that $1B+ market capitalization cannabis companies trade. Additional potential catalysts include product development news, expansion updates, and improved financial results.”
Stanley thinks TRST will generate Adjusted EBITDA of $15.6-million on revenue of $95.9-million in fiscal 2018. He thinks those numbers will improve to EBITDA of $134.9-million on a topline of $399.2-million the following year.
The analyst says investors should look at CannTrust because larger cannabis stocks are currently commanding twice its multiple.
“The broad peer group trades at an adjusted average EV/C2019E EBITDA multiple of 15.9x (see Exhibit 5), based on consensus estimates,” Stanley says. “However, companies with a $1B+ market capitalization trade at 31.4x, almost twice the group average (see Exhibit 6). Excluding TRST, that subgroup trades at closer to 35.7x, as shown on the right. We have therefore increased the multiple we use to value TRST to 17.5x from 16.0x, resulting in our new 12-month target price of $21.00/shr.”