Canadian cannabis LP Aphria (Aphria Stock Quote, Chart, News, Analysts, Financials TSX:APHA) has received a rating drop from Jason Zandberg, analyst for PI Financial, after the company’s latest earnings report came in below expectations. In an update to clients on Tuesday, Zandberg lowered his rating from “Buy” to “Neutral,” saying the company’s share price could take a hit from weaker prospects across its business segments. Leamington, Ontario-based Aphria released its fiscal third quarter 2021 financials on Monday for the period ended February 28, 2021. The company posted revenue of $153.6 million, up 6.4 per cent year-over-year but down 4.3 per cent sequentially, while net cannabis revenue came in at $51.7 million, down 24 per cent compared to the fiscal Q2. Adjusted EBITDA was $12.7 million compared to $5.7 million a year ago and compared to $12.6 million for the previous quarter. (All figures in Canadian dollars except where noted otherwise.) Aphria’s biggest news over the quarter was the announcement in mid-December of a definitive agreement to merge with BC-based Tilray, with a special meeting of Aphria shareholders to go ahead this Wednesday. The company also closed on a US$120-million financing round over the quarter and had its first quarter of results from recent purchase SweetWater, a US craft brewer. The Q3 represented Aphria’s eighth consecutive quarter of positive adjusted EBITDA. In his commentary on the quarter, Aphria CEO and chairman Irwin D. Simon focused on the “tremendous runway for long-term, sustainable growth” for the company. “The duration and impact of lockdowns across many of the regions we operate in, particularly in Canada, were greater than we initially anticipated for the cannabis industry and our business,” Simon wrote in the Q3 press release. “However, we believe Aphria remains well-positioned with our leading brands and market share to experience a robust increase in our top-line as the market improves.” “In the US, we had a solid first full quarter of contribution from SweetWater, even with lower on-premise sales compared to the prior year quarter, as many foodservice industry establishments were still operating with limited capacity,” Simon said. “Going forward, we are excited about the strategic opportunities for incremental growth as we look to parlay our branded consumer products into additional complementary product offerings in Canada, the US and internationally.” Looking at the quarter, Zandberg said the results were below expectations and pointed to a much weaker Canadian cannabis market than expected. The analyst noted APHA’s lower adult-use cannabis sales of $59.6 million, down 17.3 per cent sequentially, with the drop caused by lower prices and decreased provincial board replenishment rates, according to the analyst. Gross profit was also down 20 per cent sequentially to $31.7 million, with Zandberg chalking that up to a drop in gross margin on cannabis as a result of product returns and lower cannabis yields. As well, Zandberg noted a decrease in the average selling price to the adult-use market from $4.29 to $3.82, a trend he expects will continue due to oversupply in the Canadian market and consumer preferences for lower price point products. With his “Neutral” rating, Zandberg has offered a target price of $16.00 (previously $11.00), with the following commentary on his valuation. “We believe that the American MSOs have far superior prospects compared to the Canadian LPs yet the multiples on the Canadian cannabis companies are significantly higher. We believe this discrepancy is caused by the regulatory environment that prevents US institutions from investing in US cannabis and makes it difficult for retail investors to participate because the MSOs are listed OTC,” Zandberg wrote. “Accordingly, we have decided to change our valuation methodology this quarter by encompassing the US cannabis multiples into our valuation. Even though we believe that the prospects of US MSOs are better than the Canadian players - which should cause us to use lower multiples - we are using the large-cap MSO multiples because it is likely that APHA will soon be able to enter the US market,” he said. “Even using the US cannabis multiples, which are considerably lower than the Canadian multiples, we arrive at a NEUTRAL rating for our $16.00 price target. We also recognize that there is weakness in the valuation methodology that we are using. Firstly, there are structural problems in the Canadian cannabis market and secondly, APHA's revenue profile is not entirely cannabis (includes substantial alcohol/distribution revenue). Both of these weaknesses in the valuation methodology could point to a lower price target,” Zandberg said. Looking ahead, Zandberg is calling for APHA to generate full fiscal 2021 revenue and adjusted EBITDA of $637 million and negative $5 million, respectively, and fiscal 2022 revenue and adjusted EBITDA of $822 million and $100 million, respectively. At the time of publication, Zandberg’s $16.00 target represented a projected 12-month return of 8.4 per cent.