While much of the hype surrounding cannabis is with reference to the huge potential in the recreational use market, it’s CannTrust Holdings’ (CannTrust Holdings Stock Quote, Chart TSX:TRST) expertise in medical cannabis that sets it apart, says Rahul Sarugaser, analyst for Paradigm Capital, who on Friday launched coverage with a “Buy” rating and 12-month target of $18.00, implying a return of 116 per cent at the time of publication.

Vaughan, Ontario’s CannTrust is one of Canada’s largest patient-oriented licensed producers, Sarugaser says, with a patient base of 58,000 fuelled by organic growth and nine provincial supply agreements for more than 30,000 kg per annum. The company operates two main facilities, a newly-opened (October, 2018) 450,000 sq. ft hydroponic greenhouse in Niagara with an annual output of 50,000 kg (with expansion plans for an additional 600,000 sq. ft.) and a processing, manufacturing and formulating facility (including a 60,000 sq. ft. hydroponic greenhouse) in Vaughan.

Saruagaser says TRST is distinguished from its cannabis peers by its engagement in developing indication-specific clinical evidence, which not only bear high intrinsic value but have seemingly been missed by the market. The analyst argues that companies pursuing robust clinical and medical cannabis strategies will distinguish themselves not just with physicians and patients but will get spill-over credibility within the adult-use market through their strict compliance to quality standards and development of high-quality evidence to support claims of clinical benefit.

“A continued commitment to clinical development could drive a coming of age for the company, unlocking a future that not only has patients viewing TRST as a trusted source of medical cannabis, but will also have physicians viewing TRST as a trusted source of clinical data,” says Sarugaser.

“TRST is an LP with solid fundamentals—broad patient base, industry-leading supply agreements, innovative manufacturing quickly ramping production—but we appreciate this company for what it does differently from its peers: focusing much of its business on the Canadian medical cannabis market and the international clinical cannabis market,” he says. “While we have taken a conservative approach to our valuation of the company’s adult-use cannabis-oriented business, we find most of TRST’s value embedded in its focus on these two key, high-margin markets.”

Sarugaser sees CannTrust producing an EBITDA loss of $131.7 million in 2019 on revenue of $244.5 million. He uses a sum-of-the-parts valuation, which includes a discounted cash flow analysis of medical and adult-use sales combined with rNPVs of its clinical assets, generating a 2019 year-end valuation of $1.943 billion, or $17.97 per share, rounded to $18.00 per share.