It’s time to buy CannTrust Holdings, GMP Securities says

Following the company’s first quarter results, GMP Securities analyst Martin Landry remains bullish on CannTrust Holdings (CannTrust Holdings Stock Quote, Chart TSX:TRST).

On Tuesday, CannTrust reported its Q1, 2019 results. The company earned $12.8-million on revenue of $16.9-million, a topline that was up 115 per cent over the same period last year.

“The Canntrust team delivered exceptional operational growth in the first quarter, with harvested production of over 9,400 kilograms. 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,” CEO Peter Aceto said. “With the successful closing of our equity offering providing gross proceeds of $170-million (U.S.) (before exercise of the overallotment option), we are well positioned to execute on our growth plans. Our fully permitted phase 2 expansion is expected to reach its full capacity of 50,000 kg on an annual basis in the third quarter of 2019, and our 81 acres of land for outdoor cultivation has been prepared and we are awaiting regulatory approval to start planting. We have commenced work on our phase 3 expansion in Niagara, which we expect will add a further 50,000 kg of annual capacity. All told, we continue to expect to exit 2020 at a production rate of between 200,000 kg to 300,000 kg per year. This is a very exciting time for Canntrust and we plan to continue executing on our vision of becoming a global provider of innovative cannabis products and brands.”

Landry says these results were about what he had expected. But he adds that there is evidence that his forecasts on the company could prove conservative, as the company is currently valued 12x on an EV/CY20 EBITDA basis.

“CannTrust’s Q1/19 results showed an improvement in the company’s margin profile which supports its longterm earnings potential. At 12x CY20 EBITDA, TRST’s valuation is attractive relative to its senior peers which trade at over 40x. In our view, the recent pullback in TRST‘s shares presents investors with a compelling entry point. Our target price is derived using a DCF calculation with: (1) an 8% discount rate, (2) a ~6% share of the Canadian recreational market, (3) an average EBITDA margin of 24%, and (4) a terminal growth rate of 3.4%.”

In a research update to clients today, Landry maintained his “Buy” rating and one-year price target of $15.00 on CannTrust Holdings, implying a return of 83 per cent at the time of publication.

Landry thinks TRST will post EBITDA of $8.9-million on revenue of $148.8-million in fiscal 2019. He expects those numbers will improve to EBITDA of $70.6-million on a topline of $287.2-million the following year.