CannTrust Holdings could be next to strike deal with big tobacco or alcohol: Echelon

Licensed Producer CannTrust Holdings (CannTrust Holdings Stock Quote, Chart TSX:TRST) produced a solid second quarter, according to analyst Russell Stanley of Echelon Wealth Partners, who sees CannTrust as a prime candidate for partnership or acquisition by alcohol, pharmacy or tobacco companies looking to establish a presence in the fledgling recreational cannabis sector.

Last week, Vaughan, Ontario’s CannTrust reported its Q2 2018 earnings, with revenue of $9.1 million, a 99 per cent increase over last year’s second quarter, and posted positive net earnings for the fifth consecutive quarter.

“We are very pleased with our Q2 results. 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 October 17 legalization of the adult use recreational market,” CEO Eric Paul said.

Stanley views the quarterly results positively, noting that although revenue was slightly lower than his forecast of $9.4 million but better than the consensus of $9.0 million, TRST’s EBITDA loss was $1.6 million, which was better than his estimate of $1.9 million and matched the consensus. He says that the company’s EBITDA was below his forecast in each of the previous two quarters, making Q2’s results encouraging.

“Extracts/oils continue to be the fastest growing product category, with sales up 135 per cent year over year and 20 per cent quarter over quarter, overshadowing strong dried cannabis sales growth of 80 per cent year over year and 17 per cent quarter over quarter,” says Stanley in a note to clients last Thursday. “Extract/oil sales continue to represent 60 per cent of cannabis product revenue, and TRST continues to lead the industry on this metric.”

Stanley says last week’s deal by alcohol company Constellation Brands to increase its investment in sector leader Canopy Growth is further confirmation that “cannabis is a global market opportunity.”

“We expect M&A and strategic investment activity to heat up and we view CannTrust as a strong potential candidate for major players from any of the alcohol/pharmaceutical/tobacco/consumer packaged goods industries,” says the analyst. “On that basis, we are effectively increasing our valuation multiple by rolling forward from 17.5x EV/2019E EBITDA to 17.5x EV/2020E EBITDA.”

CannTrust Holdings stock a “Top Pick”

The analyst has trimmed his sales volume and EBITDA estimates for 2019 to reflect the potential lag in the ramp up of volumes in Ontario. He maintains his Top Pick and “Speculative Buy” ratings for TRST with the reiterated price target of $21.00, representing a projected return of 170 per cent at the time of publication.

Stanley says additional potential catalysts for TRST going forward include supply agreement announcements, GMP certification, international developments and its third quarter results due in November.