Over the past 12 months, Canadian cannabis company CannTrust Holdings (CTST) has burned through more than $55 million in negative free cash flow. CannTrust has more than doubled its revenues year over year, to nearly $41 million booked over the past year — yet deteriorated from a profitable operation earning on the order of $15 million a year in profit, to an unprofitable operation that lost more than $9 million despite growing revenues strongly.
If you’re of a skeptical frame of mind as regards the bubble-shaped marijuana economy, these are the kinds of numbers that might worry you.
However, despite financial concerns — and a lack of catalysts — Jefferies analyst Owen Bennett reiterates a ‘buy’ rating on CannTrust stock with a C$13 price target, promising near-100% upside from the shares’ recent price of C$6.65 ($5.02, US). (To watch Bennett’s track record, click here)
What worries Bennett is … a lack of “positive newsflow” out of CannTrust.
This, in a nutshell, is the upshot of the “flash report” that Bennett issued yesterday in response to CannTrust’s announcement that it has signed “a non-binding letter of intent” to set up a hemp farming operation in the U.S. to produce “high cannabidiol content” hemp for sale in the U.S. (where hemp CBD is legal).
Bennett attributes the stock’s recent weakness not to CannTrust’s abysmally unprofitable and cash-burning financials, but rather to a “lack of positive catalysts in terms of news flow.” CannTrust has made “no FMCG announcements,” laments Bennett, “despite the chairman saying back in Oct. 2018 they’d announce something by year-end.” It’s said “nothing” about expanding its production of marijuana derivatives such as edibles and vapables, “nothing” about “US exposure” either, and given “no updates on the Pharma side of things,” either.
All of which explains why the analyst is so enthusiastic to hear that at long last, CannTrust is making progress… in the newsflow department. Calling the company’s announcement that it will soon begin hemp production in California “definitely welcome,” the analyst doubled down on his positive stance on CannTrust stock. And yet, at the same time, he also injected a note of caution.
The reason is contained in the fine print from CannTrust’s Wednesday announcement:
Its deal with “diversified farming company” Elk Grove Farming Company is not a binding agreement, but only a letter of intent to eventually sign such an agreement. In any case, it’s not expected to result in any actual production until sometime in 2020. Moreover, profits from CannTrust’s arrangement with Elk Grove (if any) will be split 50-50 with CannTrust’s partner, which will have 50% ownership of the joint venture.
Despite the 50-50 relationship, CannTrust is bearing much of the risk in this venture. For one thing, it’s partnering up with an operation that Bennett notes “has no hemp experience.” CannTrust will also “guarantee” to buy the JV’s “biomass” — which serves Elk Grove’s interests more than CannTrust’s. Once in possession of the biomass, CannTrust will try to process, formulate and sell it as hemp-derived CBD products in U.S. markets. And yet, selling into this market may be difficult, for as Bennett also points out, “CannTrust still lacks a branded partner” to help sell its hypothetical hemp-derived products.
Despite all of this, Bennett recommends that you buy CannTrust. Our only question would be: “Why?”
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
