Aphria is still a buy, GMP Securities says

Higher production costs are balanced with a brighter outlook for international sales for cannabis producer Aphria Inc. (Aphria Stock Quote, Chart: TSX:APH), says analyst Martin Landry of GMP Securities, who on Monday reiterated his “Buy” rating with the raised target price of $22.00 (was $15.00).

Leamington, Ontario’s Aphria announced its fiscal first quarter 2019 financials last Friday, producing an 11 per cent quarter-over-quarter uptick in revenue, matched by a net income year-over-year increase of over 40 per cent.

Landry says the company’s quarterly results came in lower than expected on revenue at $13 million versus his estimate of $14 million and on Adjusted EBITDA at negative $4 million versus his estimate of negative $3 million.

Landry chalks the revenue miss up to lower than expected pricing per gram while the EBITDA miss stemmed from higher than expected production costs, as the company struggled with staffing shortages which led to the loss of one weeks crop.

Nevertheless, Landry is confident in Aphria’s production capacity which could reach as high as 100,000 kg in calendar 2019. The analyst also sees movement in the United States on both the omnibus farm bill which contains the Hemp Farming Act allowing CBD to be sold across the country as well as on the STATES Act which would give exempt states where recreational marijuana is legal from federal marijuana law enforcement — both of which would be in Aphria’s favour.

Aphria stock still has upside

“With significant expansion, APH is well positioned to benefit from the industry shortage. In addition, APH has an estimated $150 million in cash part of which could be deployed in the US market upon the approval of the Farm Bill or the STATES Act. The increase in our valuation stems from higher international sales to reflect our expectations that the STATES Act and the Farm Bill could be passed in the next 12 months clearing the way for APH to invest in the US,” says Landry.

Landry’s revised estimates have Aphria producing revenue and EBITDA in 2019 of $185.5 million and $14.8 million, respectively, (was $160.8 million and $28.5 million) and revenue and EBITDA in 2020 of $366.7 million and $94.2 million, respectively, (was $303.0 million and $85.8 million).

The analyst’s $22.00 target represents a projected return of 15.1 per cent at the time of publication.