CannTrust has an 86 per cent upside, says Paradigm Capital

Paradigm Capital analyst Rahul Sarugaser is staying bullish on cannabis play CannTrust Holdings (CannTrust Holdings Stock Quote, Chart TSX:TRST), saying that the company’s medical heritage gives it a level of professionalism and manufacturing rigour rarely seen in the cannabis sector.

In a Monday research note, Sarugaser reiterated his “Buy” rating and 12-month target of $17.00.

Vaughan, Ontario’s CannTrust on Monday announced an underwritten public offering of an aggregate US$200 million common shares, run by a number of US banks, with management saying that the proceeds will go towards general corporate purposes, including cultivation and facility expansion, but also, notably, biosynthesis development of cannabis compounds.

The latter project helps to set CannTrust apart from many of its competitors, according to Sarugaser.

“This expression makes TRST only the third of the ten largest Canadian LPs — after Organigram and Cronos — to explicitly announce that it is interested in the manufacture of cannabinoids using ‘cellular agriculture’ (the industry term to which we are shifting our nomenclature of ‘biosynthesis’). Like with OGI and CRON, we see this as substantial forethought by TRST’s innovative management team,” the analyst states.

Concurrent with the financing announcement, TRST management also provided guidance details on its first quarter 2019, saying that it anticipates gross margins to increase to between 42 and 46 per cent over the quarter (Q4 of 2018’s gross margin was 35 per cent), with revenue expected to come in-line with consensus expectations of around $17 million and EBITDA guided to negative $4.0 million, which would be better than the consensus negative $7.8 million.

Sarugaser says the better EBITDA “should contribute to further strength in TRST’s stock price,” which has been down since its last earnings report.

The analyst expects CannTrust to generate fiscal 2019 revenue and EBITDA of $100.1 million and negative $8.8 million and fiscal 2020 revenue and EBITDA of $169.1 million and $23.3 million. His $17.00 target represented a return of 86 per cent at the time of publication.