Aphria is still a buy, PI Financial says

After a quarter of mixed results compared to his expectations, PI Financial analyst Jason Zandberg is maintaining his “Buy” rating on Aphria (Aphria Stock Quote, Chart, News TSX:APHA).

This morning, Aphria reported its Q1, 2019 results. The company earned $16.44-million on net revenue of $126.1-million, a topline that was up 849 per cent over the same period last year but down two per cent from the previous quarter.

Aphria selling price per gram rises and falls…

The company reported that the average selling price of its medical cannabis fell from $7.66 to $7.56 per gram and the average price of its adult-use cannabis rose to $6.02 per gram from $5.73 in the quarter prior.

“We are pleased to report a second consecutive quarter of profitable growth with strong contribution from our Canadian cannabis operations. Our success was also driven by our international business and the strength and growth of our brands, particularly Broken Coast, despite a small fire at our British Columbia facility at the end of the quarter. This solid start to the year keeps us on track to achieve our fiscal year 2020 financial outlook,” CEO Irwin D. Simon said. “Going forward, we remain focused on our highest-return priorities both in Canada and internationally as our team furthers the development of our medical and adult-use cannabis brands to drive growth through innovation and return value to shareholders.”

Zandberg says Aphria’s net revenue came in below his expectations of $137.0-million, but that the company’s EBITDA bested his expectation of negative $3.3-million. Overall, the analyst still sees 27 per cent upside in the stock.

“Valuation for APHA should be viewed as the sum of parts from its cannabis business and its distribution business…”

“We are maintaining our BUY rating (risk: SPECULATIVE) and our target of $9.00 for Aphria Inc,” said the analyst in an update to clients today. “Valuation for APHA should be viewed as the sum of parts from its cannabis business and its distribution business. Our target price is based on a 16x EBITDA multiple on its cannabis operations and a 5x EBITDA multiple on its distribution business. The overall EBITDA multiple on our target is 12x FY21 EBITDA (unchanged).”

Zandberg thinks Aphria will post EBITDA of $67.7-million on revenue of $664.3-million in fiscal 2020. He expects those numbers will improve to EBITDA of $187.9-million on a topline of $925.1-million the following year.

The analyst says he is keeping an eye on the company’s cash position and its inventory going forward.

“APHA reported cash position of $464M –among the highest in the sector. However, Aphria’s operating cash flow excluding working capital was ($15.0M), down 100% qoq from ($7.5M) last quarter. The sharp decrease qoq is not ideal but management indicates that there will be a reversal to that trend next quarter. Inventory jumped from $91.5M in Q4 FY19 to $113.0M in Q1 FY20 as the company builds its inventory in preparation for legalization 2.0. Management emphasized that APHA’s near term focus is to rollout vape products in the beginning, with edibles and beverages shortly after.”