Initiating Coverage - October 23, 2017    

 

  

CannTrust Holdings Inc. (TRST-V, $4.58) 

Rating: Buy; Target: $8.00; Risk: High 

  

Neal Gilmer, MBA, ngilmer@haywood.com 

Ethan Spence, espence@haywood.com         

  

CannTrust Derivative Products to Drive Margins 

  

We are initiating coverage on CannTrust with a Buy rating and target price of $8.00. We believe that CannTrust is well positioned to continue its growth trajectory, both in Q/Q sales growth but also in oil extracts as a percent of sales.  

  

Highlights: 

  

  • Solid Growth Reported: CannTrust reported Q3/17 growth of 35%, resulting in revenues of $6.1 million. Importantly, the Company also announced that 61% of sales were from oil products that drive higher margin sales. In our view, this is one of the higher oil sales ratio among the licensed producers.  

  • On the cusp of significant expansion: CannTrust recently received its cultivation license from Health Canada for its Phase 1 expansion in Niagara. This will position the Company to realize significant growth throughout 2018, not only from the medical market it has been very successful at capturing market share, but also the recreational market that is expected to come on-line in mid-2018.   

  • A leader in oil sales, partnership with Apotex will only help improve medical reach: CannTrust's recently disclosed 61% ratio of oil sales puts it as one of the leaders in this category for LP's, in our view. This rate has continued to climb over the course of the past year since the Company was granted its oil sales license in August 2016. We believe that CannTrust's % of sales of oil/extract products will continue to increase, particularly as it releases new products, such as capsules it is currently working on, but other novel products that are likely to be developed through its partnership with Apotex (private). 

  • Initiate with Buy rating - We are launching coverage of CannTrust with a Buy rating and $8.00 target price. We believe the shares of CannTrust will continue to perform well as more investors realize the solid margins that can be recognized through a higher percentage of derivative product sales. The company has already demonstrated this with its oils, that will only increase with capsules to be released in the near-term and future formulations through its partnership with Apotex. 

  

Valuation    |  Our primary valuation metric is EV/EBITDA on a steady state or potential run rate basis. We believe that attempts to capture the market opportunity and earnings potential given the high growth rate expected in the industry overall. For CannTrust, we forecast them to be close to their run-rate capacity with our F2020 estimates. We use a 9x EV/EBITDA multiple on our F2020 EBITDA estimate and then discount by 20% to F2018. 

  

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