Aphria is still a stock to avoid, Haywood says

Aphria (Aphria Stock Quote, Chart, News, Analysts, Financials TSX:APHA) shareholders should be more than pleased with the stock’s performance over the past few months, but don’t expect the trend to continue, says analyst Neal Gilmer shareholders should be more than pleased with the stock’s performance over the past few months, but don’t expect the trend to continue, says analyst Neal Gilmer of Haywood Capital Markets. Ahead of the company’s quarterly financials due next week, Gilmer delivered an update to clients on Tuesday where he maintained his “Hold” rating on the stock with a new $26.00 target price.

Canadian licensed cannabis producer Aphria, which has greenhouse operations in Leamington, Ontario, will have a couple of big events for the company next week, starting with fiscal third quarter results due on April 12 before market open.

Investors will be hoping for more of the same from the company which saw an encouraging uplift in revenue over the previous quarter, Aphria’s fiscal Q2 delivered in early January. There the company generated $160.5 million in revenue, up from $120.6 million a year earlier, with adjusted earnings of $3.2 million compared to a loss of $48.8 million a year earlier.

Next week will also see Aphria host a special shareholder meeting on April 14 to vote on the proposed merger with Tilray, first announced last year. Aphria’s board of directors has already voted unanimously in favour of the deal.

On the upcoming fiscal Q3, Gilmer said he is calling for revenue of $169.4 million, which is in line with the Capital IQ consensus of $170.2 million and would represent a sequential growth rate of five per cent. On earnings, Gilmer is expecting adjusted EBITDA of $15.7 million, slightly above the consensus at $14.9 million.

Both the top and bottom line forecasts are lower than the analyst had previously estimated at $181.3 million and $20.1 million, respectively, with Gilmer saying Aphria’s revenue should see an uptick due to the inclusion of a full quarter from recent purchase, US craft brewer SweetWater, while lower cannabis sales will negatively hit revenue for the quarter.

“We have lowered our estimates to better reflect our view on the impact of COVID-19 across [Aphria’s] various business segments in the quarter,” said Gilmer in his report. “While Q3/F21 will benefit from the inclusion of a full quarter of SweetWater, the lockdowns in various locations likely impacted the business. We also believe cannabis revenue growth was negatively impacted with retail closures, particularly in Ontario. In addition, Q2/F21 benefitted from higher international cannabis shipments than what can be assumed on a quarterly basis.”

“We maintain our Hold rating but are increasing our target price to $26.00 (from $14.00) to reflect the multiple expansion across the sector given the prospect of US cannabis reform,” Gilmer said.

After significant declines in 2018 and 2019, Aphria saw its share price rise over 2020, with the stock returning 30 per cent for the year. The trend only got better over the first quarter of 2021, where APHA shot up by a monster 162 per cent. Those gains were in keeping with the wider sector, where, for example, the Horizons Marijuana Life Sciences ETF, which tracks the sector as a whole, returned 55 for the first quarter.

Looking ahead, Gilmer thinks Aphria will generate overall fiscal 2021 (year end May 31) revenue and adjusted EBITDA of $666.5 million and $62.4 million, respectively, and fiscal 2022 revenue and adjusted EBITDA of $915.9 million and $172.0 million, respectively.

At the time of publication, Gilmer’s new $26.00 target represented a projected 12-month return of 14 per cent.

“We continue to view Aphria as a leader in the Canadian LP landscape with exposure in the US through the SweetWater acquisition as well as international operations,” Gilmer said. “Our Hold recommendation is reflective of the relative valuation to its US peers and strong share price performance year-to-date.”

“Investors allocated significant capital into Canadian cannabis companies in Q1/21 on the prospect of federal reform in the US. The momentum has tempered as of late, and we highlight the potential for volatility depending on the visibility of the US opportunity,” Gilmer said. “We view the combination with Tilray positively, which is expected to close in Q2/21.”

Aphria announced on Monday that two independent proxy advisory companies, Institutional Shareholder Services (ISS) and Glass Lewis and Co., recommended that APHA shareholders vote for the Tilray merger.

In the press release, Aphria related comments from ISS which said the strategic rationale for the deal appears sound and that the merger would “improve the scale and footprint of the combined entity” and deliver $100 million of pre-tax cost synergies across the company’s business areas. Glass Lewis said in its comments that it believes the merger to be structured in a fair and reasonable manner and that the exchange ratio imples a standard market premium to Tilray’s unaffected stock price.

“We are of the view that the transaction represents a favourable risk/reward for Aphria shareholders given the strategic rationale provided by the board and the value-creation opportunities associated with the transaction,” said Glass Lewis in the press release.