Aphria’s full potential won’t be realized until 2020, says Mackie Research

Mackie Research Capital analyst Neil Gilmer is feeling bullish about Canadian marijuana LP Aphria (TSX:APH).

In a research report to clients last Wednesday, Gilmer maintained his “Speculative Buy” rating on Aphria, but raised his one-year price target on the stock from $4.35 to $6.40, implying a return of 32 per cent at the time of publication.

The analyst explains that he arrived at his new target price by rolling forward his valuation to use a multiple of his fiscal 2019 estimates for the company.

Gilmer expects Aphria will generate Adjusted EBITDA of $6.4-million on revenue of $21.2-million in fiscal 2017. He thinks these numbers will improve to EBITDA of $17.8-million on a topline of $56-million the following year.

In the year of his valuation basis, fiscal 2019, Gilmer expects Aphria will generate EBITDA of $46.9-million on revenue of $121-million. But the analyst cautions that we won’t see Aphria’s true potential until a couple years after that.

“Aphria is in an excellent position to benefit in this growing market and is well positioned to execute on its growth strategy,” he says. “The company has a solid balance sheet and positioned to expand towards 40,000kg in a little over a year. We are rolling forward our valuation basis to capture and reflect some of the earnings potential. We note however that the full realization of the company’s earnings potential is not likely until F2020-2021.”

On November 30, Aphria announced it had closed a bought deal financing worth $40.25-million from a a syndicate of underwriters led by Clarus Securities Inc. and including Cormark Securities Inc., Mackie Research Capital Corp., Haywood Securities Inc. and Sprott Private Wealth LP. The company said the proceeds would be used for its ongoing expansion.

Gilmer notes that Aphria currently has multiple expansions underway, with Phase Two expected to be complete shortly, a milestone that he thinks will increase the company’s total capacity to 5,500-6,000kg annually. Ultimately, says the analyst, the company’s Phase Four expansion should bring Aphria’s capacity close to 40,000kgs by 2018. But he thinks the producer won’t necessarily peak out at that level.

“We continue to believe that there is opportunity for Aphria to scale up more quickly should the demand exist,” says Gilmer.

Shares of Aphria closed today down 3.3 per cent to $5.22.