CannTrust Holdings Q4 pain is merely short-term, says GMP

Following what he describes as fourth quarter results that were “disappointing” GMP Securities analyst Martin Landry has lowered his one-year price target on CannTrust Holdings (CannTrust Holdings Stock Quote, Chart TSX:TRST).

On Thursday, CannTrust reported its Q4 and fiscal 2018 results. In the fourth quarter, the company posted Adjusted EBITDA of negative $8.5-million on revenue of $16.2-million, a topline that was up 132 per cent over the same period last year.

“We expect the trajectory of revenue growth to continue in 2019 as we bring additional capacity on line through our phase 2 expansion, realize the potential of investments we have made into training and crop yield optimization, implement targeted price increases, and distribute our products to more and more consumers,” CEO Peter Aceto said. “Additionally, Canntrust expects to take bold action to achieve leadership in growing cannabis outdoors. We have entered into letters of intent to secure approximately 200 acres of land, which we estimate will add an additional 100,000 kilograms to 200,000 kg of production in 2020, subject to regulatory approvals. In combination with our phase 3 expansion, we estimate our annual production capacity target to be between 200,000 kg and 300,000 kg. We also plan to become an early mover in vaporization products and develop further partnerships to bring innovative products to market. These initiatives are the result of thoughtful and calculated work the company has performed in assessing its growth strategy. This is truly a very exciting time for Canntrust.”

Landry notes that TRST missed his estimates on both the top and bottom line. He had modeled EBITDA of positive $600,000 on revenue of $21.0-million. But the analyst says these are ultimately short term woes.

“While Q4/18 results were disappointing, CannTrust’s long term earnings potential is unchanged,” he says. “Inventory availability should improve in the near term, TRST appears well positioned to capture market share in the vape pen category and outdoor growing should alleviate any concerns about long-term raw material sourcing. Management decided to invest more heavily in product innovation and international opportunities during Q4/18 and we should see the results of these investments in the near future. Our target price is derived using a DCF calculation using: (1) an 8% discount rate, (2) a ~6% share of the Canadian recreational market, (3) an average EBITDA margin of 24% (26% previously), and (4) a terminal growth rate of 3.4%.”

In a research update to clients today, Landry maintained his “Buy” rating, but lowered his one-year price target on CannTrust Holdings from $15.50 to $15.00, implying a return of 38 per cent at the time of publication.

Landry thinks TRST will post EBITDA of $2.0-million on revenue of $146.5-million in fiscal 2019. He expects those numbers will improve to EBITDA of $70.4-million on a topline of $286.2-million the following year.