Aphria gets “Buy” rating back at GMP Securities

Analyst Martin Landry of GMP Securities says Aphria’s (Aphria Stock Quote, Chart TSX, NYSE:APHA) appointment of a new chair of its Board of Directors will help improve governance at the cannabis company. At the same time, he calls the just-proposed hostile takeover by Green Growth Brands an unrealistic venture, arguing that the deal lacks a suitable takeover premium.

Leamington, Ontario’s Aphria has been scrambling and its stock has dropped in response to a short-seller’s report earlier this month which accused the company of wasting hundreds of millions of dollars on essentially worthless foreign acquisitions, adding the accusation that Aphria insiders had acquired stakes in the assets before Aphria bought them, generating big payouts.

While management has yet to provide a detailed rebuttal of the charges, Aphria yesterday announced that CEO Vic Neufeld would be stepping down from his Chair role (but will remain on the Board), with Irwin D. Simon of US food company the Hain Celestial Group taking up the position of independent Chair at Aphria.

“As we continue to focus on building an extremely dynamic, global cannabis company with tremendous opportunity for substantial shareholder value creation, Irwin’s decades of operational and strategic experience in health and wellness and consumer packaged goods will be very valuable,” said Neufeld in a statement.

For his part, Landry welcomes the move.

“We were looking for changes at the BOD to improve governance,” Landry said in an equity research update on Friday. “Mr. Simon is a high profile and successful entrepreneur having founded the Hain Celestial Group. He is a strong addition to Aphria’s BOD and a great step in the right direction to improve governance.

Thursday also brought news that US cannabis company Green Growth Brands was intending to acquire all of Aphria’s outstanding shares and make an all-share offer at an exchange ratio of 1.5714 for each Aphria share, which represents an offer price of $7.82.

Aphria has since rejected the offer and has related to shareholders that the deal would undervalue the company.

Landry calls the offer “highly ambitious,” pointing out that Green Growth is less than half the size of Aphria by market capitalization and that the deal would in fact represent just a three per cent premium to Aphria’s closing price before the offer was made.

Previously rated as “Under Review,” Landry now changes his recommendation back to “Buy,” with the reduced target price of $14.00 (it was $25.00 before the stock went under review).

“We have reduced our target to $14.00 to reflect the recent decline in valuations in the cannabis sector,” the analyst says. “In addition, we have increased our discount rate by 100bps to reflect recurring governance issues at APHA which have reduced management’s credibility in front of investors. Despite applying a discount rate ~200bps higher than peers, we still find value in Aphria’s shares and recommend that investors accumulate at current levels.”

Landry’s target represented a projected 12-month return of 66.1 per cent at the time of publication.