The 2019 thesis in the cannabis sector has been one where the U.S. companies are favored for cheaper valuation, but select under the radar Canadian players are intriguing. CannTrust Holdings (CTST) reconfirmed that investment thesis based on Q1’19 results, though the market remains problematic and the numbers don’t resolve a lot of the sector questions.
Initial Step
The Q1 results are the initial growth steps towards CannTrust becoming a major player in the Canadian cannabis sector. The company harvested 9,400 kgs for 96% growth over only the Q4 level of 4,816 kgs.
These numbers are on par with where Aurora Cannabis (ACB) and Canopy Growth (CGC) were in the previous quarter. CannTrust only sold 3,014 kgs of dried cannabis for a decline from the prior quarter where sales were 3,407 kgs. The sales figures confirm the general weakness in the Canadian cannabis market.
The company grew net revenues to C$16.9 million for minimal growth from Q4 due to higher rates for both medical and wholesale prices. Along with most of the industry, CannTrust still doesn’t have appreciable higher supplies on market to confirm where pricing goes in an oversupply scenario.
The company ended March with finished goods supplies of only C$9.9 million. The real boost comes from work-in-progress inventories where the values went from C$27.8 million at the end of December to C$45.3 million in March.
One big bright spot remains the medical cannabis position where revenues actually grew by C$1.7 million sequentially. CannTrust actually grew the patient count by 10,000 in the quarter in a good sign that the company can maintain the higher medical cannabis sales where dried prices per gram are nearly 60% higher.
Massive Capacity Growth
CannTrust is quickly moving into a major cannabis market position via massive capacity growth expected over the next year. The company expects to reach 50,000 kg of annual capacity in the September quarter via a greenhouse that will see capacity expand to 100,000 kg by next year.
The big production push comes from a shift to outdoor growing to lower costs. CannTrust has already purchased land for production expected to range from 100,000 kg to 200,000 kg for a total production rate of up 300,000 kg as 2020 closes.
In the course of about 7 quarters, CannTrust forecasts going from quarterly harvests of just under 10,000 kgs to around 75,000 kgs. The unknown is what happens to cannabis pricing in an environment where the illegal market still remains rampant.
Takeaway
The key investor takeaway is that CannTrust is a compelling Canadian cannabis play. The company has a market value of only $850 million based on the recent stock offering that boosted the outstanding share balance to about 138 million shares.
The stock doesn’t have a multi-billion-dollar valuation unlike other large cannabis stocks based in Canada that trade on the major exchanges like CannTrust. The recent secondary wasn’t priced at ideal levels, but the company now has about $200 million in cash to fund aggressive expansion plans that would bolster sales 25-fold in a stable pricing environment.
When looking at Wall Street’s stance, TipRanks analytics showcase CannTrust stock as a Buy. Out of 7 analysts polled in the last 3 months, 5 rate Buy on CTST, while 2 maintain Hold. The 12-month average price target stands at $9.75 marking 60% upside from where the stock is currently trading.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: The author has no positions in CTST stock.
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