CannTrust Holdings (CNTTQ) recently completed a greenhouse expansion that should boost its annual marijuana production to 50,000 kilos this year and another that's on track to increase its annualized production capacity to 100,000 kilos by the end of 2020. Additionally, management disclosed Thursday it's signed a letter of intent to acquire 200 acres to grow cannabis outdoors as well. CannTrust thinks this acquisition can add at least 100,000 kilos of production next year, but that estimate could be too conservative. If so, CannTrust could be one of Canada's biggest marijuana growers in 2020. 

A little bit of background

Most of the $150 billion spent on cannabis annually is done so illegally because of widespread marijuana prohibition. However, momentum to legalize marijuana has been growing, and last October, Canada became the first G7 nation to open an adult-use, recreational marketplace.

A person holding a marijuana leaf up in a field of marijuana growing outdoors.


Canada's cannabis market is worth approximately 6 billion Canadian dollars per year and only about CA$600 million of that was spent legally on medical marijuana there in 2018. The potential to capture billions of dollars more in legal sales has led companies previously limited to serving the medical marijuana community to invest heavily in grow capacity to meet recreational, adult-use demand.

The country's biggest producer is Canopy Growth (CGC 0.77%), a Goliath with greater than 30% market share. However, smaller players, including CannTrust, are also benefiting from the regulatory change to recreational-use laws.

With over 50,000 active registered medical marijuana customers, CannTrust is one of Canada's top medical marijuana players, and last quarter, its sales accelerated 132% year over year to CA$16.2 million in Q4 because of the new recreational market. Overall, CannTrust's CA$45.6 million in 2018 sales is good enough to make it one of the top 5 publicly traded marijuana companies by revenue.

How CannTrust could catch up

Canopy Growth, Aurora Cannabis (ACB 3.26%), and Aphria (APHA) are Canada's three biggest pot stocks by sales. Canopy Growth and Aurora Cannabis reported sales of CA$83 million and CA$54 million, respectively, in Q4, so CannTrust is far behind them. However, it has a shot at closing the gap with Aphria, which reported CA$21.7 million in sales in the three months ending November 2018. Aphria says its marijuana production capacity will exit 2019 at about 255,000 kilos.

CannTrust should reach 100,000 kilos of annual production in the back half of 2020, excluding its new acreage. The company's mum on the exact location of the land it's buying, but it could add another 100,000 kilos to production in 2020. 

That could be a conservative estimate, though. During its earnings conference call this week, CannTrust conceded it's underestimating yields to build in some wiggle room. If things go smoothly, its to-be-acquired acreage could yield 2,000 (not 1,000) kilos per acre. Additionally, CannTrust's only modeling for one harvest per year there, but while that's a long shot given Canada's climate, two harvests aren't entirely out of the question.

A hand holding up a piece of paper with a cutout shape of a marijuana leaf on it against a city street in the background.


What it means

As it stands, CannTrust expects to have 50,000 kilos of greenhouse production exiting 2019, climbing to an annualized pace of 100,000 kilos by the end of next year. Add in the plans for growing outdoors and you could get to 200,000 kilos of production at the end of 2020 at 1,000 kilos per acre or 300,000 kilos at 2,000 kilos per acre. If it's able to harvest twice in 2021, then you could be looking at up to 500,000 kilos of production, without factoring in any additional greenhouse expansions or land acquisitions. 

And even if they can't overdeliver on yield per acre, outdoor growing is the cheapest way to grow marijuana per gram, and although variability in crop quality increases outdoors, CannTrust plans to use all of its outdoor production for extracts, reducing the risk associated with inconsistent quality. Extracts traditionally command higher prices, and since outdoor production costs can be just 25% of greenhouse production costs, CannTrust's margin could enjoy profit-friendly tailwinds as soon as next year.

That would be welcome news to its investors. Its shares fell sharply after CannTrust reported disappointing fourth-quarter financials that showed profitability had been crimped by rising expenses. But management says headwinds should ease throughout 2019, allowing it to be profitable again by the end of the year.