Aphria gets big target price raise from Haywood

Haywood Capital Markets analyst Neal Gilmer is giving the thumbs up to the new acquisition by Canadian cannabis company Aphria (Aphria Stock Quote, Chart, News TSX:APHA), which just bought entry into the US market via acquiring craft brewer SweetWater.

In an update to clients on Wednesday, Gilmer reviewed the deal and lifted his target price on Aphria by almost half, moving it from $8.25 to $12.25 per share.

Leamington, Ontario-based Aphria, announced on Monday the closing of the previously-announced acquisition of SweetWater Brewing, an Atlanta, Georgia-based beer company with distribution across 27 states plus Washington, DC, and beverages at approximately 29,000 retail locations and over 10,000 restaurants and bars.

Total consideration was about US$300 million, including US$250 million in cash and US$50 million in stock at the close of the deal. Aphria said it will fund the acquisition through cash on hand and through its ATM program established earlier this year.

“We are excited to take this significant step forward to build upon our existing foundation in cannabis with the acquisition of SweetWater and their complementary cannabis lifestyle brands. Together, our company will further diversify our product offering, broaden our consumer reach and enhance loyalty with consumers,” said Aphria chairman and CEO Irwin D. Simon in a press release.

Gilmer said that SweetWater, founded in 1997 and generating US$66.6 million in revenue and US$22.6 million in EBITDA in 2019, will be immediately accretive to Aphria’s EBITDA margin and diluted EPS, with the analyst calling the transaction a positive for Aphria.

“The combined companies create a branded cannabis lifestyle company with a diverse revenue base. Aphria is also acquiring robust infrastructure that is scalable and would substantially accelerate entry into the US cannabis market, subject to federal legislation,” Gilmer wrote.

“We view this transaction positively for the diversification and brand awareness opportunity ahead of potential legalization in the US. In the meantime, it is an accretive transaction generating positive EBITDA,” he said.

Gilmer has revised his estimates and is now calling for fiscal 2021 (year end May 31) revenue of $702.5 million (previously $665.5 million) and adjusted EBITDA of $78.6 million (previously 66.8 million). For fiscal 2022, he is estimating revenue of $931.4 million (previously $843.7 million) and adjusted EBITDA of $180.8 million (previously $148.7 million). (All figures are in Canadian dollars except for where indicated otherwise.)

Gilmer said his raised target is due to the higher estimates, along with the diversified revenue and earnings base and continued positive metrics in the Canadian cannabis market.

With the update, Gilmer has reasserted his “Buy” rating for the stock, while his new $12.25 target represented at the time of publication a projected 12-month return of 24 per cent.

Aphria’s share price climbed a total of 82 per cent over the month of November, with Gilmer saying that the potential is now there for a choppy trading environment over the near term, even as he is staying positive on the company’s fundamental outlook.

“We believe Aphria has established itself as one of the leaders in the industry on many fronts. In our view, it has been at the forefront of various industry accomplishments. The company has been successful in scaling up its production capabilities, capturing market share and generating positive EBITDA. Over the years the company has completed acquisitions that have diversified its revenue base that provides a strategic entry either to new markets or market segments. The company continues to execute in capturing market share in Canada and now has a toehold in the US through its SweetWater Brewing acquisition,” Gilmer said.

Compared to its peers, Gilmer estimated Aphria to be trading at a discount to its peers, with the stock trading at 18.5x his fiscal 2022 EV/EBITDA estimate compared to its plus-$200-million market cap Canadian peer group at 28.6x excluding highs and lows. On an EV/Revenue basis, Aprhia is trading at 4.1x calendar 2021 consensus estimates versus the peer group at 5.5x.

Aphria last reported earnings in mid-October, showing fiscal Q1 2021 record gross revenue for adult-use cannabis of $69.6 million, up 23 per cent sequentially. Net cannabis revenue was $62.5 million, up 103 per cent year-over-year, and net revenue was $145.7 million, up 16 per cent year-over-year but down four per cent from the previous quarter due to COVID-related distribution issues. Adjusted EBITDA was $10.0 million compared to $1.0 million a year earlier, while Aphria’s net loss for the quarter was $5.1 million or $0.02 per share compared to a gain of $16.4 million or $0.07 per share a year earlier.

Early last month, Aphria announced a supply agreement between European cannabis pharmacy company ODI Pharma and Aphria’s wholly-owned German subsidiary CC Pharma GmbH. The deal has a five-year term with an annual minimum of 1,200 kg of medical cannabis and will expand Aphria’s international presence into Poland, according to Aphria CEO Simon.

“This partnership is further evidence of our global commitment to provide patients with access to high-quality medical cannabis products as well as a testament to the strength and quality of our medical brand, Aphria,” Simon said in a press release.