A beleaguered CannTrust Holdings’s (TSX:TRST)(NYSE:CTST) stock remains heavily beaten down today, even as the company appears much closer to regaining its licences and has preserved cash flow during the period with suspended operating licences.
Shares traded around $1.20 exit 2019, and they had recorded an agonizing low of $0.99 a share recently — a price point too bearish, even after considering the self-inflicted crisis the company finds itself in today.
Let me explain.
Trading below cash value?
At a share price of $1.20 on Thursday, the company’s total market capitalization was a humble $169 million. Yet management disclosed that CannTrust had a cash balance of around $185 million on in its coffers as of November 30, 2019.
Barely a month later, investors had discounted this liquid resource by a significant margin, and written off all the company’s tangible assets. There isn’t any goodwill on TRST’s books. All tangible assets, including grow rooms and processing facilities, were essentially written off by the market.
You could theoretically buy the whole company for its cash resources and make a staggering profit just by winding up its operations and selling off property and plant and equipment assets at giveaway prices in a fire sale auction.
The company promised to temporarily lay off about 140 of its employees between October and December 31 to save about $0.4 million in cash flow per month, and the move will only cost about $0.8 million in severance packages if the individuals aren’t re-hired within 35 weeks. The cash balance could stretch for longer.
No debt in capital structure
There’s no debt on the company’s books after the last loan was paid off before maturity, so there aren’t any debts to worry about anymore.
And then the licences…
The company could potentially be back in compliance with Health Canada’s guidelines and regulatory requirements within three months from now.
Reading from a December 5, 2019, update, management could meet the conditions for the reinstatement of their suspended business licences by the end of the first quarter of 2020, but this will be subject to Health Canada input and approval.
As I argued earlier, the regulator has been very lenient with this once-rogue pot producer, and it was up to a serious executive team to bring the company back in good terms with the key stakeholder with an average effort.
News of licences reinstatement could violently lift the stock from today’s trading levels.
Potential risks
Several investor class-action lawsuits have been served or still in the process of being filed. There should be some strong evidence against the company if media reports that claimed that even the CEO was an accomplice in the scandal are to be taken seriously.
Lawsuits could drain all liquidity and sink the firm forever, but there could be some insurance cover against such operational risk eventualities, and some property could still be sold to cover these.
Further, the company is yet to file its restated financial statements for the year 2018 and subsequent quarterly instalments. The longer it takes for these required documents to be lodged with securities regulators, the higher the risk of shares being delisted from exchanges. Delisted stocks face very high discounts for lack of liquidity.
The further shares trade below US$1.00 on the New York Stock Exchange, the higher the risk of delisting from this prime market, but the company has over five months to be back in compliance with minimum price requirements there, and the share price may skyrocket upon news of licences reinstatement much sooner.
Keen eyes are on the suspended licences. Sales need to resume for the accumulated inventory to be liquidated and bring in cash flow to the business. The longer it takes for licences to be granted, the harder it will be to revive the business and directly compete with peers for customers in an increasingly oversupplied marijuana market.
Foolish bottom line
It will be a challenge for CannTrust to regain market confidence and trust from all key stakeholders after the scandal settles. Risks remain elevated and keep increasing with each additional week that sales licences remain suspended.
I would still hold a position and anticipate to cash in when the good news rolls in.
