Oscillations in the cannabis market have been prevalent in the past year as the period saw the entry of numerous companies and investors into the market (which led to a sector-wide price surge) followed by a correction in the prices due to below-expected financial performance in the months that followed. Numerous companies, including CannTrust Holdings Inc (OTCMKTS: CTST), operating within the cannabis sector were affected by this price action. As seen in the price action below, the entity underwent the rise and decline during the aforementioned period.
CTST seems, however, to be quickly coming out of this period of decline. Riding on their improved financial performance over the first quarter of 2019, the firm is now on the verge of take-off. In just the last week, the price has risen from lows of $5.5 to highs of $6.44; a 17% increment – see the chart below. The current price is, however, lower at $6.08.
Given that a single announcement has had such an impact on their performance, we opted to have a look at this financial performance and analyze whether the firm has put in place measures to ensure that it remains on the same trajectory. This report is a synopsis of our findings.
History of CTST
CannTrust Holdings Inc. was founded back in 2015 and was headquartered in Vaughan, Canada. Since inception, the firm has continued to specialize in the production and sale of both medical and recreational cannabis across Canada. Initially, as was the case with other Canadian companies, the firm was oriented towards the sale of cannabis and cannabis extracts to medical patients. However, this changed with the law to legalize recreational cannabis federally.
Since then, the firm’s capacity has continued to grow immensely whereby it now employs over 570 employees and has a market capitalization of over $800 million. The above announcement is expected to see this growth trend further maintained.
Quarter’s Performance: Review and Critique
CTST produced stellar results over the past quarter, surpassing analysts’ estimates. According to Reuters, consensus estimates from analysts for the first quarter of 2019 spoke to the firm making losses. Earnings per share forecasts for the quarter ending May 2019 were at -$.04.
Actual results, however, came as a surprise to the market as the firm announced a $9.5 million net income ~ C$12.8 million which was significant of a 12.3% increment from the C$11.4 million which the firm had made in the same period of 2018. The results represented an earnings per share result of $.12. Moreover, this was also a 4.2% increment from the previous quarter.
The spectacular performance was tied to the firm’s revenue growth. CTST experienced a 115% growth in the firm’s revenue from the C$7.84 million booked in the first quarter of 2018 to the C$16.85 million recorded in the most recent quarter. Leading this growth was the growth in the number of registered patients on their platform who stood at ~ 68,000 by March, a near 18% growth from the ~ 58,000 patients registered by the 2018 year-end. This led to an increase in medical cannabis sales to C$11.37 million, up from C$9.64 million in the same period of 2018. Sales from the wholesale of recreational (adult-use) cannabis, however, declined from C$6.52 million to C$5.48 million.
While the above presented a positive outlook, the firm’s EBITDA remained negative. The primary driver for the observed bottom-line performance was, thus, the fair value adjustment to their biological assets. CTST recorded an 11% pre-fair value adjustment to their biological assets which consequently halved the EBITDA loss and increased their gross margin to 46%.
Regardless of the above, CTST had worked tirelessly towards growth given their actual revenue growth. Despite the incline towards citing the negative EBITDA, such adjustments are of importance to investors who own the biological assets and are, therefore, crucial to the firm’s performance. However, the firm will need to work towards a positive EBITDA and eventually in order to sustain its share price into the future.
While the revenue grew drastically over the 1Q19, it missed consensus estimates of C$17.2 million by ~ C$.3 million. According to CEO Peter Aceto, the miss in revenue was due to the ‘…need to stockpile inventory to ensure the company can serve its rapidly growing medical-cannabis patient base’. He further cited timing issues between harvesting and supply as part of the issues which affected their sales.
While that remains the case, CTST remains on track to achieving their vision of producing 50,000 kilograms of cannabis by end of the third quarter of 2019. This follows the Phase II expansion project which has seen the firm plant about 450,000 square feet of cannabis. Moreover, CTST has already secured all approvals necessary for their Phase III development which will see them grow to 100,000 kilograms of produce by 2020.
With this in play – coupled with the continued signing of agreements with Canadian companies – the firm expects to increase its revenue base into 2019 and thereafter. Going forward, CTST is working towards venturing into other countries across the globe such as with the agreement signed with Denmark’s licensed producer, Stenocare. The firm continues to eye entry into the European market both to diversify geographically and to increase its market share across the continent.
With the firm operating continually in the green zone, investors therein expect to continue reaping the rewards. While it seems that the short-term benefits accruing to these investors are high, CTST will need to work towards increasing their EBITDA margin to a positive one in order to achieve sustainable positive returns. Nevertheless, even in its current state, the firm seems to be on the path towards growth.
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Disclosure: We have no position in CTST and have not been compensated for this article.
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The post CannTrust Holdings Inc (OTCMKTS: CTST) Making A Comeback appeared first on Insider Financial.