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CannTrust Holdings Inc.

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TRST-CSE: $6.83 | SPECULATIVE BUY 
12-Month Target Price:
 $15.00  
Projected Return: 120% | Valuation: 13.0x F2019 EV/EBITDA

Russell Stanley | rstanley@echelonpartners.com | 647.794.1922 
 

Taking Top Pick Target Up 

Event: We reiterate our Speculative Buy rating as well as our Top Pick classification, and are raising our 12-month target price from $6.25/shr to $15.00/shr. When we originally launched coverage, we noted that our estimates and target price reflected baseline forecasts that had significant upside potential. We have increased our F2019 revenue/EBITDA estimates to reflect the benefit of the planned Phase 2 expansion, which we view as fully funded following the Company’s recent equity financing (co-led by Echelon Wealth Partners). Since it began publicly trading on August 21st, TRST has been one of the top performing cannabis stocks in our tracking group, with a return of 173% against the group average of 78%. Potential catalysts include improved financial results, additional product development news and the granting of a sales license for the Niagara facility.

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 detail, please refer to our recent initiating coverage report.

$20M Equity Financing Closed; Doubling of Niagara Capacity Fully Funded– CannTrust recently completed a $20M bought deal private placement (including full exercise of the overallotment) at $5.00/shr. This was originally announced as a $15.0M offering, but was increased given strong demand. The Company has also arranged a $15.0M mortgage on its Niagara Greenhouse facility, and we expect the lender’s credit committee to approve the mortgage shortly. We therefore believe the Phase 2 expansion is fully funded, allowing TRST to double annualized production capacity at the Niagara facility to 40,000kg by mid-2018.

TRST Reported Strong Q317 Results, and Initial Shipments to Australia – TRST reported revenue/adjusted EBITDA of $6.1M/$1.2M, beating our original forecast of $4.8M/ ($0.8M). The revenue outperformance was driven by sales volumes that beat our estimate by 26%, with both dried cannabis and cannabis oil sales volumes better than expected. As of late last week, TRST had 35,000 active patients. Moreover, the Company recently received Health Canada approval to export medical cannabis; shipments to Australia have begun, and management expects to soon begin shipping to Germany, Denmark and Brazil.

Capacity Increase Drives Near Doubling of F2019 EBITDA Forecast to $111M – The Phase 2 expansion should double annualized production capacity at the Niagara facility from 20,000kg to 40,000kg, with completion expected in mid-2018 (our model assumes first harvest in late 2018). This is the primary driver behind the increase in our F2019 EBITDA estimate from $57M to $111M. Absent any change in the valuation multiple (10x EV/2019E EBITDA), this would justify a target price of $11.50+. However, as the group average multiple has doubled since we initiated coverage in late August, we are increasing our valuation multiple to 13x EV/2019E EBITDA, and are raising our 12-month target to $15.00/shr from $6.25/shr.

Our Estimates Leave Significant Upside for Better Utilization and Stronger Yields – Should F2019 production reach full utilization (vs. our 70% forecast), our EBITDA estimate and 12-month target price would improve to $154M and $21/shr, respectively. Should crop yields outperform on top of that, our EBITDA and 12-month target prices could improve to $225M and $30/shr, respectively.



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ck here for full version of this note.
                                                                                                  Click here for initiating coverage report.