Buy Canntrust Holdings for 91 per cent upside, Beacon says

Following the company’s recent financing, Beacon Securities analyst Russell Stanley has maintained his “Buy” rating on Canntrust Holdings (Canntrust Holdings Stock Quote, Chart TSX:TRST).

On Monday, Canntrust announced the closing of a public offering of more than 36-million shares sold at (U.S.) $5.50 per share, for gross proceeds of approximately $170-million. The company said it plans to use the funds for facility expansion and enhanced extraction capacity, amongst other things. The company also completed a plus a (U.S.) $30-million secondary offering by existing shareholders at the same price.

Stanley today incorporated the financing into his financial modeling on TRST and updated clients with the information.

“We have reflected the treasury offering in our model. We have also introduced the planned buildout of the outdoor cultivation footprint, and we assume that TRST adds 75,000 kg of capacity in each of 2019 and 2020,” the analyst said. “In combination with the planned Phase 3 greenhouse expansion, our model assumes that TRST exits 2020 with aggregate annualized capacity of 250,000 kg. We have accordingly increased our 2020E gross revenue (from $283M to $505M) and EBITDA forecast (from $76M to $96M). Our new estimates are well above current F2020 consensus estimates (revenue $259M, EBITDA $62M), although based on FactSet data, we believe that many peers have yet to update their forecasts for the financing/outdoor grow plans. We continue to use a 23x EV/2020E EBITDA multiple for valuation purposes. The dilution offsets the upward EBITDA revisions in our model.”

In a research update to clients today, Stanley maintained his “Buy” rating and one-year price target of $15.00 on Canntrust, implying a return of 91 per cent at the time of publication.

Stanley says TRST is now trading at an 86 per cent discount to its US-listed peers.

“TRST now trades at 12x our revised 2020E EBITDA estimate,” the analyst adds. “This represents a 45% discount to the 21x average for the broad peer group, and an 86% discount to the 82x average amongst companies that have a US exchange listing. The stock has been under significant pressure of late, which we attribute to disappointing Q4/18 results, followed by the US$200M offering. While we continue to believe the stock is undervalued, a technical perspective suggests the stock could decline further before recovering.”