Aphria acquisition of Broken Coast gets thumbs up at Canaccord Genuity

A proposed $230-million acquisition by Aphria (TSX:APH) has Canaccord Genuity analyst Matt Bottomley raising his price target on the company’s stock.

This morning, Aphria announced it had entered into a binding letter agreement to acquire 100 per cent of the issued and outstanding share capital of B.C.-based LP Broken Coast Cannabis Inc. The resulting company, management explained will be the largest licensed producer by adjusted EBITDA and second largest by revenue in calendar year 2018.

“Adding one of Canada’s most-sought-after premium brands represents a major triumph for Aphria and our shareholders and firmly establishes our position as a Canadian leader in premium indoor cannabis production,” said Aphria CEO Vic Neufeld. “Broken Coast has proven that you can grow premium quality cannabis, charge a reasonable price and earn a profit all at the same time. Our two companies are closely aligned, particularly as it relates to our relentless focus on production costs and profitability. We look forward to learning from each other and bringing more Broken Coast cannabis to current medical patients and future adult recreational use consumers in Canada.”

Bottomley broke down the deal.

“Broken Coast is an award-winning British Columbia-based indoor Licensed Producer (LP), approved for the production and sale of dried bud and cannabis oils. Broken has already amassed close to five years of operating history (as the 12th LP issued in Canada), and grows out of a 26,000 sq. ft. facility on Vancouver Island. The company is undergoing a multi-phase expansion that will add an incremental ~78,000 sq. ft. of production area with plans to reach a total capacity of 10,500 kg by early 2019. Although the expected volumes to be acquired by Aphria are relatively modest given its existing expansion plans (100,000 kg via Part IV and 120,000 kg via Double Diamond), we believe Broken Coast’s recognized brand and geographic location could provide the company with a strategic inroad to Western Canada ahead of legalization. We believe provincial exposure/relationships are becoming increasingly important as each province is set to design and implement its own distribution platform for recreational cannabis in Canada later this year.”

In a research update to clients today, Bottomley maintained his “Speculative Buy” rating, but raised his one-year price target on the stock from $23.00 to $23.50, implying a return of 14.6 per cent at the time of publication.

Bottomley thinks Aphria will generate Adjusted EBITDA of $15.2-million on revenue of $47.0-million in fiscal 2018. He expects those numbers will improve to EBITDA of $91.2-million on a topline of $258.0-million the following year.

The analyst says the stock still looks attractive.

“Although Canadian LP valuations have seen a significant uptake as of late, we believe Aphria continues to remain attractive on its relative valuation, with a two-year fwd EV/EBITDA multiple of 19.5x, versus its most comparable peers at 23.3x. After modestly bumping our target to $23.50 (from $23.00) on the back of this deal, we would remain buyers of Aphria at current levels, but caution investors to be aware of potential industry pullbacks that could result in lower near-term entry points.”