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CannTrust: Current Target Price and Valuation Multiple

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As of Monday, CannTrust (CTST) (TRST) was trading at 3.04 Canadian dollars. Therefore, the company has lost 53.6% of its stock value since the beginning of July.

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CannTrust deals with compliance issues

Last month, CannTrust received a non-compliance report from Health Canada. The report was for the company’s greenhouse facility in Pelham, Ontario. The company issued a statement after the report. According to CannTrust, it grew cannabis in rooms that weren’t licensed. Due to the findings, Health Canada withheld the sale of 5,200 kilograms of products. CannTrust voluntarily held back the sale of an additional 2,300 kilograms of products. Also, the company temporarily suspended the sale of its medical cannabis products.

On August 9, Health Canada notified CannTrust that its manufacturing facility in Vaughan, Ontario, didn’t comply with specific regulations. Notably, the new notification caused CannTrust’s stock price to fall 27.8% on Monday.

CannTrust’s stock performance

This year, CannTrust stock has fallen 53.7%. So far, the company has underperformed its peers and the broader equity market. Year-to-date, Aphria (APHA), Canopy Growth (WEED) (CGC), and Aurora Cannabis (ACB) have returned 10.3%, 18.8%, and 28.3%, respectively.

Last week, Aurora Cannabis stock rose. The company’s management provided better-than-expected fourth-quarter guidance. On August 1, Aphria reported its fourth-quarter performance, which beat analysts’ expectations. Canopy Growth will report its earnings for the first quarter of fiscal 2020 on August 14. Read What to Expect for Canopy Growth’s Earnings to learn more.

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Lower valuation multiple

The fall in CannTrust’s stock price lowered its valuation multiple. As of Monday, the company was trading at a forward EV-to-sales multiple of 1.88x—compared to 3.27x at the beginning of July. The company was trading at a discount compared its average EV-to-sales multiple of 4.10x for the past seven months. On the same day, the median EV-to-sales multiple for the nine Canadian cannabis companies was 5.33x.

Analysts’ recommendations

In the above graph, you can see that analysts’ average target price has fallen since February. However, the allegations that CannTrust violated Health Canada’s regulations might have prompted analysts to lower the target prices. Earlier this month, Eight Capital cut its target price from 4 Canadian dollars to 2 Canadian dollars. As of Monday, analysts have given CannTrust a 12-month target price of 5.75 Canadian dollars. On the same day, the company was trading at a discount of 89.1% from analysts’ 12-month target price.

Among the six analysts that follow CannTrust, three recommended a “hold,” two recommended a “buy,” and one recommended a “sell.”

What do analysts expect?

Analysts expect CannTrust to report revenues of 101.6 million Canadian dollars in 2019. Overall, the company’s revenues will likely rise 122.6% YoY from 45.6 million Canadian dollars in 2018. During the same period, analysts expect the company to become profitable. For 2019, analysts expect CannTrust to report a net income of 5.2 million Candian dollars—compared to a net loss of 12.6 million Candian dollars.

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