Cannabis producer company CannTrust Holdings Inc (NYSE: CTST) said Monday that it accepts a Health Canada non-compliance finding; this "sharp turn of events" prompted Bank of America Merrill Lynch to double downgrade the stock.
Christopher Carey downgraded CannTrust from Buy to Underperform with a price target lowered from CA$9 ($6.87) to CA$4.50 ($3.44).
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Health Canada put a freeze on 5,200kg of cannabis inventory and CannTrust voluntarily set aside another 7,500 kg of inventory, Carey said in a Monday downgrade note. (See his track record here.)
The combined 12,700kg of inventory represents "the majority" of CannTrust's inventory and, based on first-quarter average costs, represents around CA$70 million ($53.5 million) in product, the analyst said.
The following three events "seem likely" to occur, Carey said:
- A material impact on September-ending quarter sales.
- Gross margin pressure as CannTrust looks to fill supply gaps by sourcing from other producers at a higher cost.
- Sales pressure into next year.
Health Canada granted permission for CannTrust to continue producing cannabis at the facility in question, which is capable of producing 12,500kg of cannabis per quarter, Carey said.
A key risk to BofA's bearish stance is the potential resolution in which CannTrust can sell the frozen inventory, the analyst said.
Another risk: the potential for CannTrust to be acquired given the weakness in the stock, according to BofA.
CannTrust shares were down 21.26% at $3.89 at the time of publication Monday.
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Latest Ratings for CTST
|Jul 2019||Initiates Coverage On||Buy|
|May 2019||Initiates Coverage On||Buy|
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