Aphria’s future still looks bright, GMP Securities says

GMP Securities analyst Martin Landry says that while quarterly results from Aphria (Aphria Stock Quote, Chart TSX:APHA) were underwhelming, the company should get over its growing pains and flex some of its considerable earnings power.

In a research update to clients Tuesday, Landry reiterated his “Buy” rating and $14.00 target price, which translates into a projected 12-month return of 21.7 per cent at the time of publication.

Licensed cannabis producer Aphria released its third quarter fiscal 2019 financials on Monday, coming in with revenues of $73.6 million, up 240 per cent from the previous quarter, and an Adjusted EBITDA loss of $14.4 million.

The top line was below both Landry’s and the street’s estimates of $80.0 million and $83.0 million, respectively, as was the EBITDA line, which was lower than Landry’s negative $4.7 million and the consensus negative $5.3 million.

Landry notes that Aphria’s volumes in the recreational channel dropped 32 per cent sequentially in Q3 to 1,329 kg, while all-in cost of sales was $3.76 per gram, higher than the $2.60 per gram in the previous quarter. The analyst points to packaging bottlenecks and the company’s decision to use additional room for propagation over the quarter as contributing factors as the company works its way through the early months of recreational production and sales.

“Aphria reported poor Q3FY19 results reflecting a transitional phase,” says Landry. “Management remains confident in reaching its capacity goal of 255 tonnes which, using current average selling prices, translates into potential revenues from its Canadian cannabis operations in excess of $1 billion. This scenario assumes that the company can sell its full production of 255 tonnes which we believe may be difficult to achieve given the expected industry overcapacity.”

“Aphria is testing investors’ patience with Q3FY19 short of expectations sending its shares down ~14 per cent on Monday. As the company works through its growing pains, the temporary issues which plagued Q3FY19 results should get fixed. In our view, the company has significant earnings power which is about to get more apparent,” he adds.

The analyst has decreased his forecasts for fiscal 2019 and 2020 to reflect Aphria’s current run rate and expects Aphria to take a lower market share of the domestic rec market over the near-term as a result of the slower-than-expected ramp-up. Landry is now calling for 2019 revenue and EBITDA of $186.3 million and negative $43.6 million, respectively, and 2020 revenue and EBITDA of $668.2 million and $76.1 million, respectively.

Landry says that at 16x his calendar 2020 EBITDA estimate, APH is trading at roughly a 46-per-cent discount to its peers.