Bank Of America Double Downgrades CannTrust After Health Canada Findings

Cannabis producer company CannTrust Holdings Inc 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.

The Analyst

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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The Thesis

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. 

Price Action

CannTrust shares were down 21.26% at $3.89 at the time of publication Monday. 

Related Links:

'420 Investor' Brochstein To CannTrust CEO: Apologize And Resign

CannTrust Plummets Following Health Canada Compliance Issue, Potential Supply Shortage