Cannabis MarketExpansionHempStock Talk

Is CannTrust a Buy? We think so.

By June 26, 2019 No Comments

Vaughan, Ontario-based CannTrust Holdings Inc. (TSX: TRST,NYSE: CTST), a Canadian producer of medical and recreational cannabis with over 72,000 patients in Canada, announced it is establishing hemp operations in California, with plans to become a major hemp CBD supplier in the US.

It signed an LOI with Elk Grove Farming Company, a diversified farming company in California, to grow low-cost hemp with high CBD content on over 3,000 acres of farmland in California. CannTrust and Elk Grove will each have 50% ownership

CannTrust currently operates its main cannabis harvest facility in Pelham, Ontario, and packages products in Vaughan, Ontario. It has purchased 81 acres of land in British Columbia and expects to secure over 200 acres in total for low-cost outdoor cultivation for extraction products.

 

Is the stock a buy?

CannTrust’s stock closed at $5.02 today. Like much of the industry, it has declined recently, down 50% from $10 since late March, as investors take a more sober look at many companies’ valuations.

We think the stock is a good value now, with a Price to Sales ratio of about 13, just 2.7x the average P/S ratio in the mature tobacco industry. It currently produces revenue at about a US$50 million annual clip and is priced for revenue of about $140 million per year. Based on its production capacity it should be able to generate over $400 million in revenue in the coming years, assuming it can survive the inevitable coming industry shakeout and sell all the cannabis it grows.

We think it can.

CannTrust’s US strategy

CannTrust believes there will be increasing demand for hemp-based CBD from international retailers and product manufacturers, and those buyers will require expertise in genetics and processing that CannTrust can provide.

“Our U.S. operation…will give (us) a foothold in the largest international CBD market in the world with an experienced and knowledgeable partner,” said Peter Aceto, CEO.

This is the first step in CannTrust’s development of full-scale U.S. operations—securing a long-term, low-cost source of industrial hemp from a proven partner. Elk Grove has experience in farming many commodities and expertise in leading crop protection products, application and input supply. It has extensive knowledge of farming in California.

CannTrust will guarantee to buy the biomass produced by the Joint Venture, and will process, formulate and sell hemp-derived CBD products in the U.S.

“… we have the liquidity to fund our ambitious growth plans including our greenhouse expansion in Niagara, our outdoor cultivation in British Columbia, our global footprint expansion, and now our U.S. operation, ” added CEO Aceto.

CannTrust’s investment in the U.S. operation is expected to be up to $20 million through to the end of 2020. This assumes starting with up to 300 acres for cultivation in 2020.

Details of the JV

The Joint Venture will secure a long-term lease for over 3,000 acres of farmland in Southern California, currently owned by Elk Grove’s Houchin family, or through partnership investment. CannTrust will provide expertise in growing, drying and extraction, and provide genetics. Elk Grove will lead operations and provide land and warehouse space for drying and handling.

Both parties will provide equal capital and take equal profits.

Upon signing a binding agreement, operation of the JV is targeted to begin in 2020.

Elk Grove Farming Company, LLC is a diversified farming and farm management company with headquarters in Bakersfield, California. It is owned by Tech Agricultural Corporation and the Houchin family. It also offers crop protection products and financing for crop production and input supply, agricultural real estate brokerage and investment services, custom farm management, corn and alfalfa seed distribution and dairy mineral supplements.

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