CannTrust Holdings has an upside of 129 per cent, Beacon Securities says

Expansion plans at CannTrust Holdings (CannTrust Holdings Stock Quote, Chart (TSX:TRST) have Beacon Securities analyst Russell Stanley staying bullish on the stock.

This morning, Canntrust announced it had received permission to proceed with its phase 3 expansion in the town of Pelham, Ontario, albeit with a footprint of 390,000 square feet instead of the 600,000 in the initial application.

“We are pleased with the outcome of the discussions with the Town of Pelham,” CEO Peter Aceto said. “We believe this decision reflects our view that we are a trusted member of the community and that we are intent on listening to our stakeholders. The demand for our medical and recreational products continues to be well in excess of supply and we are keen to move ahead with the phase 3 expansion and meet our capacity targets. We also continue to evaluate several strategic alternatives to meet and increase our initial production capacity goals. We are actively pursuing strategic acquisitions of land and facilities, both inside and outside Ontario, and hope to update shareholders with these initiatives in due course. Our active patient count continues to increase, and the recreational market is currently undersupplied. We intend to make every effort to serve these markets with our award-winning products.”

Stanley think this is a clear win for CannTrust.

“We view this development positively as it paves the way for the company to reach its previously announced production targets,” the analyst said.

Addressing the reduced square footage, Stanley doesn’t think it will present a problem.

“The company announced that its permits allow for a 390,000 SFT expansion, which is notably lower than the original forecast of 600,000 SFT,” he notes. “However, with additional investments in automation and climate control, management still expects the final capacity to be unchanged at 100,000kg. First harvest is expected in Q2/20, with construction completed in Q3/20, and full capacity reached in H2/20. At first glance, the capacity objective may seem aggressive given the reduced footprint. However, we believe the original capacity projections were actually too conservative. Phase I (25,000kg on 250,000 SFT) represented a yield of 100 grams/SFT of facility footprint. Phase II (another 25,000kg on an incremental 200,000 SFT) represented a yield of 125 grams/SFT on the incremental footprint, or 111 grams/SFT for Phase I and II combined. The original Phase III projections (an incremental 50,000kg on 600,000 SFT of additional footprint) represented a yield of 83 grams/SFT, which was significantly lower than the expected yields from Phase I and II. The new projection (50,000kg on 390,000 SFT) represents a yield of 128 grams/SFT, which is only marginally higher than the forecast yield from Phase II. We therefore view the revised Phase III yield projections as reasonable.”

In a research update to clients today, Stanley maintained his “Buy” rating and one-year price target of $21.00 on CannTrust, implying a return of 120 per cent at the time of publication.

Stanley thinks TRST will generate Adjusted EBITDA of $1.0-million on revenue of $57.0-million in fiscal 2018. He expects those numbers will improve to EBITDA of $51.1-million on a topline of $175.8-million the following year.