It’s been a miserable week for investors in Canadian cannabis company CannTrust Holdings (CTST), which saw its stock price cut nearly in half over five days of trading, after revealing Monday that it spent much of the period from October 2018 and March 2019 growing marijuana in hydroponic grow-rooms that were (at the time) not yet licensed for that purpose.
Health Canada inspectors discovered the license violation at CannTrust’s Pelham, Ontario “Niagara” facility, and have decided to punish the breach by forbidding CannTrust from selling 5,200 kilograms of dried marijuana flower produced in said rooms until they deem CannTrust to be back in compliance with their regulations. CannTrust is also voluntarily withholding a further 7,500 kilograms, from a different facility, from distribution while the investigation is ongoing.
While 12,700 “kilograms of marijuana” may sound like a lot, though, it really isn’t — not with CannTrust moving towards an annual production target rate of some 200,000 to 300,000 kilograms of the stuff in the not too distant future. More important to investors is the possibility that CannTrust management knowingly tried to deceive its regulator about what it was growing and where — and the profound lack of judgment that suggests, given that Health Canada can basically decide whether CannTrust thrives or withers up and dies, through its power to grant to or withhold licenses from the company.
It’s this concern that caused analysts at Canadian investment bank Canaccord to publish a “lowering recommendation” report on CannTrust Thursday.
As analyst Derek Dley wrote in his report, “employees of CannTrust may have knowingly deceived Health Canada to grow cannabis in rooms which had yet to be licensed.” As a result, it’s at least “within the realm of possibility” that Health Canada may now “look to make an example out of CannTrust and potentially pull the company’s production license.”
Now mind you, this outcome is not certain. To the contrary, Dley believes the more likely outcome is that Health Canada will demand that CannTrust destroy the 5,200 kg of unlicensed product, and impose a fine. But the risk of a worst-case scenario cannot be ruled out — and “even if the company does retain its license” (emphasis added), the analyst warns that there are a wide range of other potential punishments Health Canada could mete out — none of which would be good news for CannTrust shareholders.
Long story short?
At the very least, “the credibility of CannTrust has now been put into question,” and given how important it is for investors to feel they can trust a company to be a good steward of their investment, CannTrust no longer merits “a premium multiple” relative to other cannabis stocks. Accordingly, Dley is downgrading the stock to “hold,” and cutting its price target to CAD$5 a share.
Not coincidentally, the analyst is also revising his estimates for this year, cutting revenue expectations nearly in half (CAD$95 million), quadrupling the size of their expected EBITDA loss, and reversing his prediction that CannTrust will earn a profit — predicting a CAD$0.02 loss instead.
When you consider that this is the good news — that investors might have to wait another year to see CannTrust turn profitable again — and that the bad news is that CannTrust might not even be in business a year from now, well, it’s only then that can truly appreciate how bad this news is, and why CannTrust’s stock price collapse is entirely justified.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
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