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Aphria’s acquisition of Broken Coast makes sense, GMP says

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aphria An acquisition that will make Aphria (TSX:APH) a strong player in the west coast of Canada is sensible, GMP Securities analyst Martin Landry says.

On Monday, Aphria announced it planned to acquire Broken Coast Cannabis, a Licensed Producer from British Columbia. The resulting company, management said, 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.”

Landry today broke down the reasons why he thinks this is a good deal for Aphria shareholders.

“We view the BC acquisition positively for the reasons outlined below,” the analyst says.

1. A strong recreational brand. The recreational tilt of BC’s brand, and reputation for high product quality (4.5 rating on Lift.co, among “Top Indica Flowers” at Canadian Cannabis Awards) fills in a gap for APH, and should improve the company’s recreational presence. Hence, adding the BC brand should help boost APH’s ability to capture market share. To reflect this, we have raised our DCF forecast to 11.5% market share from 10% previously.

2. Wider genetics bank. BC has access to a wide selection of strains, some of which are unique-in-market. With product breadth expected to be a key driver of market share, BC should substantially differentiate APH’s offering.

3. Diversified production. The addition of BC’s indoor growing model diversifies APH from a pure greenhouse grower, and should enable both entities to leverage best practices with BC’s key team members staying on.

4. Reasonable value. Pro-forma expansion plans, the purchase price of $230m represents an EV/forward sales multiple of ~3.5x, lower than the ~4.5x metric implied by ACB’s CMED offer, and ~6x for the Canopy/Mettrum deal.”

In a research update to clients today, Landry maintained his “Hold” rating, but raised his one-year price target on Aphria from $20.00 to $22.00, implying a return of 1.4 per cent at the time of publication.

Landry thinks Aphria will generate EBITDA of $10.3-million on revenue of $40.1-million in fiscal 2018. He expects those numbers will improve to EBITDA of $108.8-million on a topline of $276.8-million the following year.

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About The Author /

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.

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