CannTrust Holdings Inc.
Now Trading at 54% Discount to Peer Group View Report (PDF)
Event: CannTrust continues to be one of our Top Picks, with a Speculative Buy rating and 12- month target price of $15.00/shr. After a strong start to last week, TRST closed down 5% on Friday, which we attribute to the tragic passing of Mr. Barry Sherman and his wife, Mrs. Honey Sherman. Our investment thesis and estimates are unchanged, and as noted, CannTrust remains one of our Top Picks.
Investment Thesis: CannTrust Holdings is a licensed producer (LP) of medical cannabis, operating a hydroponic indoor production facility in Vaughan, Ontario, and a greenhouse facility in Fenwick, Ontario.For additional details, please refer to our recent initiating coverage report.
- Sherman Founded Apotex Inc. (Private), CannTrust’s Partner in Developing Pharmaceutical Applications – Mr. Sherman founded Apotex Inc., the seventh largest generic pharmaceutical company globally, and the largest Canadian-owned player in the space. CannTrust and Apotex are partners in a joint venture under which CannTrust provides the raw material (dried cannabis) to support development of novel dosage formats, such as sustained release and other proprietary dose forms. Apotex is a major player in its markets, and employs 11,000+ people globally. While Friday’s news is tragic, and without diminishing Mr. Sherman’s importance, we remain confident that the joint venture will continue its work towards pharmaceutical product development.
- Based on EBITDA Forecast, CannTrust Now Trades at a 54% Discount to the Peer Group Average – As discussed on pages 3-4 of this note, TRST trades at approximately 6.8x our EBITDA estimates for 2019. This represents a 54% discount to the adjusted average for the peer group of 9x C2019E EBITDA, based on consensus estimates (as TRST has December 31 FYE, its F2019 is equivalent to C2019). Moreover, we believe that our estimates offer significant upside. Should utilization levels at Niagara approach full capacity (vs. our estimate of 70% in 2019), our EBITDA estimate would improve to $154M (all else equal). The stock is now trading at a 67% discount to the peer group, based on that EBITDA scenario, which would (again, all else equal) justify a 12-month target price of $21/shr. Moreover, should yields also outperform our assumptions, our EBITDA forecast could improve to $225M. The stock is currently trading at a 77% discount, based on that scenario, which would support a 12-month target of $30/shr.
- Based on Funded Capacity, TRST Trades at a 34% Discount to its Closest Peer – TRST trades at approximately $18/gram of funded capacity. This represents a 17% discount to the adjusted average for the peer group of $21/gram. Moreover, we believe that TRST’s high value revenue mix warrants a premium on this metric, because oils typically generate much stronger pricing/margins. TRST leads the peer group, with 61% of last quarter’s revenue from oils. CanniMed Therapeutics (CMED-TSX, $19.41, Speculative Buy, $24/shr PT) is in second place at 57%, with the next highest share being 33%. We therefore view CMED as CannTrust’s closest peer for the purpose of this metric, and CMED trades at $27/gram of funded capacity. On that basis, TRST is now trading at a 34%