CannTrust Holdings Stock: Can Investor Trust Be Restored?

CannTrust Holdings Inc. (TSE:TRST), one of the Canadian marijuana stocks, saw its share price plummet during the past week following a Health Canada investigation

SmallCapPower | July 15, 2019: CannTrust Holdings Inc. (TSX:TRST) (NYSE:CTST), one of the Canadian cannabis stocks, has seen its share price plunge more than 48% during the past five trading sessions to C$3.34 currently, following a Company announcement on July 8, 2019, that Health Canada notified CannTrust that its greenhouse facility in Pelham, Ontario is non-compliant with certain regulations. Specifically, the non-compliance is based on observations by the regulator regarding the growing of cannabis in five unlicensed rooms and inaccurate information provided to the regulator by CannTrust employees.

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The regulator put 5,200 kilograms of cannabis grown at those room on hold, while the Company voluntarily placed a hold on an additional 7,500 kg of dried cannabis equivalent at another facility. CannTrust added that’s too soon to tell what the impact on its financial results will be from these incidents.

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In reaction to this, The Ontario Cannabis Store said it has removed certain CannTrust products from its online store and from distribution to physical outlets until Health Canada completes its investigation. And, Alberta as well as CannTrust’s Danish partner Stenocare made similar moves.

According to BNN Bloomberg, this is not the first time CannTrust has been called out by regulators. The media outlet reported that from April 2015 to March 2018, CannTrust was cited with 15 major or critical observations made by Health Canada during site inspections at CannTrust locations, including one in February 2016, where the federal regulator seized hundreds of kilograms of cannabis from the Company.

While CannTrust has since responded by suspending sales and shipments of all of its cannabis products, it may be too little, too late. Reputational damage can take years to repair. Re-branding the Company may be necessary.

A more likely scenario, however, would be an outright acquisition by a larger Licensed Producer (LP). CannTrust has a well-developed, medical-cannabis focused infrastructure (including a network of over 2,400 physicians), a greater percentage of higher-margin cannabis oil sales (about 60% to 70% of its medical sales were oils and capsules during the first quarter of this year) compared with most LPs, and significant ownership stakes in an EU-based company as well as an Australia-based cannabis business.

During Q1 2019, CannTrust saw 19% quarter-over-quarter patient growth to 68,000. And, as of March 31, 2019, the Company had more than $250 million of pro-forma cash on its balance sheet.

CannTrust Holdings stock currently trades at a market cap of about $470 million.

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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