Research Report - December 4, 2017    

  

  

CannTrust Holdings Inc. (TRST-V, $7.15) 

Rating: Buy; Target: $10.75 (from $8.00); Risk: High 

  

Neal Gilmer, MBA, ngilmer@haywood.com 

Ethan Spence, espence@haywood.com 

  

Equity Financing For Phase 2 Expansion 

  

CannTrust closed its equity financing last Thursday that raised the Company gross proceeds of $20M towards its Phase 2 expansion in Niagara. 

 

  

Highlights: 

  

  • Raised Gross Proceeds of $20M: On Thursday morning, CannTrust announced the closing of its equity financing that raised the Company gross proceeds of $20.0M at a price of C$5.00 per share. The shares issued are subject to a four month and one day hold period that will expire March 31, 2018. 

  • Principal use of Proceeds:  The principal use of proceeds under the offering are to be used to fund the build out of Phase 2 at CannTrust's recently licensed greenhouse facility in Niagara, as well as for general corporate and working capital purposes.      

  • Solid Q3/17 results reported: On November 23rd, CannTrust reported its full Q3/17 results, after providing preliminary revenues for Q3 in early October. Overall, the Q3 results were solid with revenues of $6.1 M, 61% of which were oil and adjusted EBITDA of $1.2M. 

  • Significant Potential Growth: With CannTrust's phase 2 expansion now fully funded, the Company is on track to double its production to 40,000 kg per year. We expect the expansion to be complete towards the middle of 2018 with its first harvest from Phase 2 in the fall of 2018. 

  • Reiterate Buy rating - Following the financing, we believe that CannTrust is well positioned to execute on its expansion at the Niagara facility. 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. We are raising our target price to $10.75 based on de-risked balance sheet following the financing and multiple expansion across the entire cannabis sector. 

  

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 12x EV/EBITDA multiple on our F2020 EBITDA estimate and then discount by 20% to F2018. 

  

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