Aphria is a beaten-down buy, Haywood says

Aphria (Aphria Stock Quote, Chart, News TSX:APHA) shares sold off sharply after its latest quarterly earnings, but the dip makes for a good entry point, says Haywood Capital Markets analyst Neal Gilmer, who considers Aphria the leader among Canada’s cannabis companies.

In an update to clients on Friday, Gilmer reviewed the quarterly numbers and reiterated his “Buy” rating
for the stock.

Aphria’s shares dropped almost 18 per cent on Thursday as the licensed cannabis producer delivered its fiscal first quarter 2021 ended August 31, 2020. Net revenue came in at $145.7 million, which was up 16 per cent from a year earlier but down four per cent from the prior quarter. Aphria chalked up the sequential decline to lower distribution revenue due to the COVID-19 pandemic. (All figures in Canadian dollars except where noted otherwise.)

“Our strong first quarter results reflect the continued robust growth and development of Aphria’s adult-use cannabis brands in Canada,” said CEO Irwin D. Simon in a press release. “We are consistently taking a diversified approach to our innovation, strategic partnerships, global expansion and corporate citizenship to fuel sustainable, long-term growth. We believe that the  strength of our balance sheet and cash position, combined with our consistent focus on our highest-return priorities, will generate sustainable long-term value for all stakeholders.”

“We continue to view Aphria as the leader in the Canadian LP landscape. We believe yesterday’s 18 per cent correction provides an attractive entry point given Aphria’s strong market share position. We expect the company will continue to demonstrate its leading position, supported by expanding EBITDA margins in fiscal 2021…”

It was the company’s sixth consecutive quarter of positive adjusted EBITDA at $10.0 million. Aphria finished the quarter with $400.0 million in cash and equivalents and also filed a prospectus supplement for US$100 million At-the-Market program that has yet to be drawn on.

For his part, Gilmer said while Aphria’s quarterly revenue came in below expectations, the key metric of growth in cannabis sales remained strong. The analyst was calling for $161.2 million compared to the company’s $145.7 million and the consensus estimate of $159.6 million, while adjusted EBITDA of $10.0 million Gilmer called in-line with his expectations at $8.4 million.

On the resulting selloff, Gilmer said, “Investors seemed focused on a drop in the distribution revenue and that the bulk of cannabis growth was due to sell-in of its new value brand. We remain positive on Aphria’s strong market share across its brand portfolio.”

Gilmer noted Aphria’s quarterly total gross cannabis revenue grew by 23 per cent sequentially and was driven by dried flower and vape sales, which were up 38 per cent and 17 per cent, respectively. The company’s cash-cost to produce a gram stayed flat at $0.87 per gram while all-in-cost of sales dropped by 17 per cent to $1.41 per gram.

As a result of the Q1 numbers, Gilmer made what he called minor adjustments to his estimates and is now calling for fiscal 2021 revenue and adjusted EBITDA of $670.6 million and $77.7 million, respectively, and fiscal 2022 revenue and adjusted EBITDA of $843.7 million and $148.7 million, respectively. The analyst has maintained his price target at $8.25 per share, which at press time represented a projected 12-month return of 30 per cent. Gilmer labelled APHA’s risk factor as “Very High,” with a potential downside scenario of 37 per cent.

RISKS TO APHRIA STOCK

The analyst listed three key risks to investing Aphria. The first, he said, is the company’s reliance on license.

“Aphria is reliant on its licenses from various regulatory bodies to operate in the domestic and global medical and adult-use cannabis market. Changes to these licenses could impact the company in a positive or negative manner,” he said.

Second, Gilmer said Aphria has a facility risk.

“Aphria is dependent on its facility infrastructure to grow, cultivate, and process cannabis for eventual use by patients across Canada. Any event that may impact the facilities it operates would impact its ability to grow and sell to its patient base or adult-use customers.

Lastly, the analyst said the company faces competition.

“The cannabis market in Canada has strong competition all pursuing the medical patient population and the recreational user. As Health Canada continues to approve and expand the number of licensed producers it could increase competition within the industry.”

“We continue to view Aphria as the leader in the Canadian LP landscape. We believe yesterday’s 18 per cent correction provides an attractive entry point given Aphria’s strong market share position. We expect the company will continue to demonstrate its leading position, supported by expanding EBITDA margins in fiscal 2021,” Gilmer wrote.