Aphria has a 92 per cent upside, says GMP Securities

Licensed cannabis producer Aphria (TSX:APH) has announced an agreement to acquire LATAM Holdings in an all-stock deal worth $193-million.

The purchase will give Aphria clear long-term potential in Latin America, says analyst Martin Landry of GMP Securities, who nevertheless is leaving his estimates for APH unchanged, noting that the LATAM expansion will lend support to his fiscal 2020 forecast.

A subsidiary of Scythian Biosciences Corp (TSXV:SCYB), LATAM Holdings owns four assets: a 90 per cent stake in Columbian medical cannabis producer Colcanna; a 49 per cent stake in Jamaican cannabis producer Marigold; a 100 per cent stake in Argentinean pharmaceutical import and distribution company ABP S.A.; and rights to purchase 50.1 per cent of Brazillian incorporated entity expected to receive a cultivation, processing and distribution licence in Brazil.

Aphria CEO Vic Neufeld says the deal will firmly place his company at the centre of the medical cannabis industry in Latin America and the Caribbean.

“We have spent a considerable amount of time and resources evaluating opportunities in Latin America and the Caribbean and we are confident in the long-term strategic opportunity and the value it will bring to our shareholders,” Neufeld said in a press release.

Landry says that of the bunch, the Colcanna purchase is the most meaningful asset, as the company owns 34 acres of land in Colombia’s coffee zone for outdoor cannabis production, with a potential for 30,000 kg of cannabis per year.

“While the purchase price of $193m may seem high at first glance given the limited revenue base of the asset acquired, the long- term potential appears attractive,” Landry said in a client update on Wednesday. “Brazil and Argentina could open up their markets to medical marijuana in coming years, potentially increasing significantly the addressable market for Aphria. In addition, Colombia provides a good export platform in the event that the domestic medical market does not grow as rapidly as expected.”

The analyst says Aphria’s shares are currently trading at about 14x CY19 EV/EBITDA, which is a 15 per cent discount to its senior licensed producer peers. Landry calls the discount unjustified and expects that APH will re-rate in the coming months.

Ahead of Aphria’s Q4 earnings report on August 1, Landry is projecting the company will report revenue of $10.4 million, slightly below the consensus of $10.8 million and representing a two per cent quarter-over-quarter increase.

The analyst says he’ll be looking for management’s comments on: the progress of Aphria’s Nuuvera acquisition; details on supply agreements with provinces in Western Canada; details on the readiness of its inventory in lead-up to rec cannabis in October; and further details on APH’s agreement with Great North Distributors.

Landry today maintained his “Buy” rating and $20.00 target price for APH, representing a projected return of 91.9 per cent at the time of publication.