Aphria is a buy, says PI Financial

PI Financial’s Jason Zandberg is keeping his “Buy” rating and $8.00 target on Aphria (Aphria Stock Quote, Chart, News TSX:APHA) ahead of the company’s third quarter earnings Wednesday.

In an update to clients on Tuesday, Zandberg said he expects healthy EBITDA growth from Aphria.

Cannabis was supposed to be having a bounce-back year in 2020 but that was before the COVID-19 crisis threw all predictions out the window, even for an industry reportedly seeing a sizeable uptick in business despite social distancing requirements and a stay-at-home culture currently being practiced across Canada and the United States.

In Aphria’s case, Zandberg said he’s calling for third quarter revenue up 80 per cent year-over-year and up ten per cent sequentially to $132.5 million with EBITDA climbing to $10.4 million versus $3.8 million in the company’s second quarter and compared to a loss of $9.0 million for the same period a year ago.

In its press release on April 14, Aphria said its third quarter net revenue grew by 65 per cent sequentially to $55.6 million, while adjusted EBITDA from cannabis operations came in at $6.0 million, a 78 per cent sequential increase. The company ended the quarter with cash and equivalents of $515.1 million.

In his quarterly comments, chairman and CEO Irwin D. Simon said Aphria’s facilities, offices and patient care teams remain open and operational during the current COVID-19 pandemic, saying,

“Going forward, we believe Aphria continues to be differentiated in the cannabis industry through our brands, cultivation expertise, high quality standards, cash position and balance sheet. We continue to focus on the highest return opportunities for growth and long‐term value creation,” Simon wrote.

As for his part, Zanberg said, “Aphria was one of the first LPs to roll out 2.0 products and we expect a meaningful contribution from these products in Q3 FY20. Distribution revenue is expected to be flat from previous quarter.”

The analyst said that as far as available cash goes, APHA should be doing fine, with the company closing over the third quarter on a $100-million investment from an institutional investor and secured an $80-million credit facility for its Aphria Diamond joint venture with Double Diamond Farms.

“Aphria’s balance sheet remains strong compared to its Canadian cannabis peers that are scrambling to secure additional funding in the presently challenging capital markets environment,” Zandberg said.

“Management indicated during last quarter’s earnings call that it has significant capex budget but even after these expenditures the Company will have +$300 million in cash for strategy growth initiatives,” he said.

The analyst wrote that Aphria may either revise or retract its fiscal 2020 guidance due to the potential impact of COVID-19 on operations, even as management had already reduced its guidance at the Q2 juncture, moving gross revenue from between $650 million and $700 million to between $575 million and $625 million and moving EBITDA from between $88 million and $95 million to between $35 million and $42 million.

For his part, Zandberg is keeping his fiscal 2020 and 2021 estimates at revenue of $577.7 million and $878.2 million, respectively, and EBITDA at $37.4 million and $150.2 million, respectively.

At press time, his $8.00 target represented a projected 12-month return of 66.3 per cent.

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