News that CannTrust (CTST) was deemed non-compliant by Health Canada for cultivating cannabis in greenhouse facilities that didn’t have licenses has sent BMO analyst Tamy Chen to the sidelines. Chen walks investors through this bloodbath, as shares dropped nearly 22% to their lowest point since 2017.
Health Canada singled out five greenhouse rooms that were not licensed to produce weed between October 2018 and March 2019. Without a license, CannTrust grew cannabis in these facilities. Adding insult to injury, the company did not provide accurate information to the Canadian regulator. As a result, Health Canada has placed a hold on over 5,000 kg of dried cannabis that was harvested from the unlicensed rooms. To soften the blow, CannTrust has advised Health Canada of issues that may impact compliance at its unlicensed facility regarding product storage, and voluntarily held ~7,500 kg of pot harvested.
All in all, CannTrust placed a hold on 12,700 kg of inventory pending further review by Health Canada, and investors clearly getting nervous.
In the wake of this troubling news, Chen downgraded the stock from Outperform to Market Perform, while slashing her price target to $6.00 (from $11.00). (To watch Chen’s track record, click here)
Chen wonders “how the company would have commenced cultivation in unlicensed rooms,” and is “surprised by this development and the inability of CannTrust’s internal operational controls to prevent this.” But more importantly, the analyst points out that it’s “unclear what Health Canada could decide regarding the 12,700 kg of inventory on hold as well as the products that were sold in the market.” Chen “understand[s] that there is a wide range of potential outcomes and there could be a potential risk that some of the inventory currently on hold may ultimately not be allowed for sale.” This would be a significant loss for CannTrust, which sold 3,014 kg sold last quarter. This means that the inventory being held is equivalent to one entire year of sales.
As part of the review process, Chen noted that the company is conducting a comprehensive internal review, and retained two external advisers to review its compliance processes.
Overall, this scandal has the potential to damage CannTrust’s credibility in the Canadian cannabis space. However, cautious optimism still circles this cannabis player, as TipRanks analytics exhibit CTST as a Moderate Buy. Out of eight analysts polled in the last three months, five are bullish on CannTrust stock, two are sidelined, and one is bearish on the stock. With a return potential of nearly 112%, the stock’s consensus target price stands at $7.00. (See CTST’s price targets and analyst ratings on TipRanks)