CannTrust sheds U.S. business in order to list on TSX

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Medical-cannabis grower CannTrust Holdings Inc. is moving its interests in the United States off its books in order to list its stock on Canada's biggest equities market and broaden its investor base.

Shares of CannTrust rose in their debut on the Toronto Stock Exchange (TSX), gaining 2 per cent on Monday to close at $9.16.

The move comes half a year after the Vaughan, Ont.-based company went public with a listing on the Canadian Securities Exchange (CSE). The small venue has become a magnet for pot stocks with assets in the United States, where the drug is allowed in some states, but is illegal under federal law. That's because TMX Group Ltd., which operates the TSX and TSX Venture Exchange, has banned firms that violate U.S. federal law from its ranks.

Last August, CannTrust had to list on the CSE because it was earning a royalty from its stake in a joint venture that makes and sells tea and coffee pods that are infused with marijuana in a few U.S. states where the drug is legal, starting in Nevada and pushing into five other states.

CannTrust held a patent on this form of dosage, but didn't contribute any product or capital to the United States. The business south of the border was just getting off the ground, so much so that Bay Street analysts had yet to attribute much value to it.

To satisfy the TSX, CannTrust is dumping its exposure to the U.S. market – for now. In February, it said it struck a deal to assign its interests in the United States for $1 to a company affiliated with its joint-venture partner Club Coffee LP, which makes coffee pods. CannTrust can buy those assets back for $1 should TSX policy or U.S. federal law change.

The jump to the TSX from the CSE should make CannTrust's stock more attractive to deep-pocketed asset managers such as Fidelity Investments and the big Canadian banks, says Eric Paul, CannTrust's chief executive. He says that some large investors haven't been able to buy stock in the company because they have mandates that restrict them from owning shares of CSE-listed businesses.

"Our stock is way undervalued," added Mr. Paul, who is also a pharmacist.

"We believe now that we're listed on the TSX, a number of the institutions that have sat on the sidelines, even though they liked our story and where we're at, will start to buy our stock. That barrier has come down."

Several analysts agree with Mr. Paul, writing in recent reports that the company has been held back by its listing on the CSE and the confusion over the legal risks around doing business in the United States.

CannTrust trades at about half the peer-group average valuation multiple based on 2019 estimates for earnings before certain costs.

The listing on the TSX "should help close the gap," wrote Russell Stanley, an analyst at Echelon Wealth Partners Inc.

Vahan Ajamian, an analyst at Beacon Securities Ltd., said the uplisting will help CannTrust catch up to the country's largest growers, which have watched their valuations soar in recent weeks. Shares of sector heavywights Canopy Growth Corp. and Aurora Cannabis Inc. are worth $6.4-billion and $5.5-billion, respectively.

CannTrust's shares, in contrast, are worth $847-million, sliding in February after eclipsing $1-billion for a brief time in January amid a trading frenzy across the cannabis sector that strained the systems of Canada's largest discount brokerages.

The TSX's policy against U.S. assets that break federal law has been felt across the nascent industry. It has breathed life into TMX rival the CSE, which has earned listings and trading fees as activity jumped.

It has also made Leamington, Ont.-based grower Aphria Inc. change course. Last month, the company divested a portion of its shares in Florida's Liberty Health Sciences Inc. to investors of Aphria. The stock was bought by three members of Canada's Serruya family, which founded the Yogen Fruz chain, and by an affiliate of Delavaco Capital, whose president is Andy DeFrancesco, a strategic adviser to Aphria.

The bulk of Aphria's position in Liberty is sitting in escrow and will also be sold to the Serruya family members and Delavaco over time. Aphria does have a way to opt out of those planned sales should the TSX amend its policy to allow U.S. cannabis investments.