CannTrust Holdings Inc. (CNTTQ)

[Timetravelerdos]

CannTrust: The Only Bright Spot Among Canadian LPs

Cornerstone InvestmentsNov. 23, 2018 10:00 AM
Summary

CannTrust was the only Canadian cannabis stock that reported strong earnings, which prompted a 30% rally on Thursday.
During 2018 Q3, sales grew 105% to $12.6 million, and CannTrust reported positive EBITDA and net income.
CannTrust remains one of the most underrated cannabis companies compared to stocks like Canopy, Tilray and Cronos.

Welcome to our Cannabis Earnings series where we break down the latest earnings to help you focus on the most important topics.

Introduction

CannTrust (OTC:CNTTF) came to the rescue last week when the market sold off on the back of disappointing earnings from Canopy (CGC), Aurora (ACB), Cronos (CRON) and Tilray (TLRY). After three days of selling off, CannTrust's strong earnings staged a broadly-based rally in which its stock rose 30% before giving back some of the gains on Friday. We are reiterating our long-time recommendation that CannTrust is a core holding for cannabis investors due to its strong market positioning and inexpensive valuation.


2018 Q3 Earnings

CannTrust reported total revenue of $12.6 million last quarter, a 105% increase from last year. The revenue increase was in sharp contrast to the stagnant sales at Canopy, Aurora, and Tilray, which grew revenue by 33%, 55%, and 86% respectively. CannTrust also reported positive adjusted EBITDA and net income despite softer margins. Medical cannabis sales represented the majority of its revenue while wholesale business also brought in $3 million in sales. We expect wholesale business to represent the majority of its sales starting in the next quarter as legalization sales are comprised almost entirely of wholesale arrangements with provinces at prices far below the retail prices in today's medical cannabis market.


(Press Release)

CannTrust sold a total of 1,363 kg of cannabis and equivalent during the quarter including 51% from cannabis extracts. The average selling price was $8.77 for dried cannabis in medical and $6.40 in wholesale, which highlights the significant reduction in selling price and gross margin that will come as a result of legalization. We also expect cannabis extracts to represent an increasingly larger share of the overall sales as companies come out with new product lines and consumers experiment with other forms of cannabis consumption both medically and recreationally.


(Press Release)

CannTrust also reported $86 million of cash as of last quarter, which should be enough given its modest capacity expansion plan and other capital projects. Therefore, we do not foresee the need for near-term capital raising. CannTrust recently announced an investment in National Access Cannabis (OTCPK:NACNF), a Canadian cannabis retailer. CannTrust acquired 19.8% of CannaTrek, an Australian-based licensed cannabis operator. The company also made its first shipment into Denmark through its local distribution partner, Stenocare, which began trading publicly with CannTrust owning 25% of it. Stenocare currently relies solely on the imports from CannTrust, but it will be using the IPO proceeds to build out its own facilities.

Looking Ahead

Last week, we published "CannTrust's Confusing CEO Appointment And Its Future," in which we raised questions on the new CEO but maintained our favorable view for the company. The earnings last week had little to do with the new CEO, but we were relieved by several developments.

Besides being a traditional leader in the Canadian medical market, CannTrust is also well positioned in the recreational market with supply agreements with 9 provinces and a distribution agreement with Breakthru Beverage Group, one of Canada's largest broker of spirits, wine, and beer. We think CannTrust will continue to capture a sizeable market share in the Canadian market due to its existing market position and strong value propositions as a reliable and trustworthy cannabis supplier to consumers and provinces.

CannTrust also announced that it is seeking a listing on the NYSE, following Aphria (APHA) and Aurora, to become another Canadian LP to list in a major U.S. stock exchange. Despite the fact that a U.S. listing does not guarantee a positive impact on the stock based on what happened to Aurora and Aphria, we think improved access to U.S. investors would help the company in the long run as it improves its shareholder base to include more institutional investors. We believe CannTrust remains one of the most underrated cannabis stocks compared to the likes of Canopy and Tilray. However, that is changing, and the stock has definitely made a name for itself last week when it surged 30% after strong earnings.

Author's Note: Follow us to receive our latest publications on the sector. We also publish a widely read Weekly Cannabis Report, which is your best way to stay informed on the cannabis sector. We are the only place to find detailed research on over 50 cannabis companies in the U.S. and Canada.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.