Cannabis company Aphria Inc. (APHA:NYSE, TSX) may have a profitable future ahead of it but even with the opening of the rec marijuana market in Canada, there’s little for the educated investor to go on in pricing it. That’s the opinion of Ryan Modesto, CEO of 5i Research, who claims that many of Canada’s pot companies are already priced for perfection.
Aphria’s stock is getting pummeled in early trading on Monday as investors react to a recent short-seller report which charges company insiders with profiting from shady acquisitions of “virtually worthless” entities. The report from Quintessential Capital Management charges Aphria insiders with acquiring stakes in overseas shell companies which they then prompted Aphria to purchase at inflated prices.
The report claims that the shell companies have little or no sales, operations or corporate structure and were bought with $700 million in funds raised through dilutive share issues.
“More worryingly, we noticed what appear to us as systematic attempts to hide the true nature of these transactions, for example changing the names of the shell companies involved in a way that makes it harder to link them to Aphria’s insiders,” reads the report.
So far, Aphria management has stated that it is preparing a response to the allegations along with “pursuing all available legal options against Quintessential Capital.” Down more than 20 per cent on Monday, Aphria had already been on a slide since the opening of recreational sales in Canada, dropping 43 per cent between October 17 and November 30.
Modesto says that much like the rest of the pot sector, Aphria has much to prove.
“It’s a name that we prefer to sit on the sidelines for a bit longer. Let them get a few more quarters and see what the real picture looks like when revenues start to come in,” says Modesto of 5i Research, to BNN Bloomberg.
“Our main issue is just the volatility — these companies can swing ten per cent on any given day, so it’s a very special kind of investor who can handle that kind of volatility, at least with any kind of material position in their portfolio,” he says.
“The marijuana industry is here, it’s here to stay and it’s going to be a big industry. There’s some growth there. [But] are these the companies that are going to dominate it going forward and maintain high market shares as people are pricing in? Those are the big unknowns and there really aren’t any answers,” he says.
Leamington, Ontario’s Aphria is the fourth-largest cannabis company by market capitalization at $2.3 billion. On October 12, the company reported quarterly revenue of $13.3 million and Adjusted EBITDA of negative $4.0 million for the period ended August 31.
“Even with the pullback that [the cannabis sector] has had, the valuations are still quite high, just looking at sales,” says Modesto. “When you’re priced for perfection and there are a lot of expectations in that price, that can become a bigger issue. There’s no margin of error.”