CannTrust Holdings is trading at a big discount to its peers, Beacon Securities says

Beacon Securities analyst Russell Stanley is staying the course after Q1 results from cannabis licensed producer CannTrust Holdings (CannTrust Holdings Stock Quote, Chart TSX:TRST). On Tuesday, the analyst reiterated his “Buy” recommendation and $15.00 target price, which represented a projected 12-month return of 80 per cent at the time of publication.

CannTrust reported quarterly revenue on Tuesday of $16.9 million in its first quarter 2019, amounting to a 155-per-cent year-over-year increase, with 67 per cent coming through its medical channel and 33 per cent through its recreational channel. The company’s Q1 Adjusted EBITDA was a loss of $3.8 million.

“The CannTrust team delivered exceptional operational growth in the first quarter, with harvested production of over 9,400kg. This is a 96 per cent increase in production over the prior quarter and reflects the impact of the investments made into our facilities, as well as process improvements to increase throughput,” said Peter Aceto, CEO, in a press release.

Stanley says he views the Q1 results to be solid, with the $16.9 million in revenue coming in-line with his estimate as well as the consensus, while the $4 million EBITDA loss was better than his $6 million estimate and the Street’s $7 million. The analyst adds, however, that EBITDA was impacted by changes to the company’s accounting policy absent which the number would have been closer to $7 million.

The analyst notes that management reiterated in its guidance its prior predication that the second quarter of this year would show an acceleration in revenue growth. In all, Stanley is leaving his fiscal 2020 EBITDA forecast intact, saying that CannTrust is showing signs of production improvement and that the recent announcement of a letter of intent with the province of Quebec’s SQDC is a highlight.

“Management reported harvested production of 9,424 kg, more than triple Q1/19 sales volumes of 3,014 kg, and almost double Q4/18 production levels of 4,816 kg,” said Stanley in a client update on Tuesday. “While we do not expect the entire Q1/19 harvest to be sold through in Q2/19, these figures demonstrate that the Phase 2 expansion is already yielding improved production levels that should support meaningful revenue growth this quarter.”

“Quebec has thus far relied on a relatively small number of producers, with just six announced in early 2018, followed by the addition of Organigram earlier this year. While TRST will ‘start small’ by supplying two of its strains later this year, the size of the province and its concentrated approach to product sourcing make this a major market opportunity,” he says.

Stanley estimates that CannTrust is currently trading at an 88-per-cent discount to its US-listed cannabis peers. He is calling for fiscal 2019 revenue and EBITDA numbers of $177 million and negative $5 million, respectively, and fiscal 2020 revenue and EBITDA of $465 million and $96 million, respectively.