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Earnings Report: Aphria $APH $APHQF - Mushroomstocks | Mushroomstocks
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Earnings Report: Aphria $APH $APHQF

Jul 12, 2017 • 12:42 PM EDT
Aphria.png
6 MIN READ  •  By Michael Berger
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Aphria Inc. (APH.TO) has been under significant pressure this quarter and the shares have fallen more than 30% during the last three months. Today, Aphria reported its fourth quarter and fiscal year 2017 financial results and we are favorable on the company and expect to see continued growth and improving fundamentals over the coming quarters.

Aphria is well positioned to capitalize on Canada’s medical cannabis sector as well as the proposed legal recreational market, expected to be implemented by July 2018. The company is also levered to the booming cannabis market in the United States. From Arizona to Colorado, from cultivation to technology, Aphria is levered to some of the most attractive cannabis markets in North America.

Capitalizing on the Canadian Cannabis Market

Canada’s medical cannabis market continues to record double digit monthly growth based on patients registered in the program and this trend has shown no signs of slowing down.

Aphria should record significant top- and bottom-line growth over the next year after Health Canada approved its Part II expansion in May. The expansion increases total annual capacity to 8,000kg at a cost of approximately $8 million with a further $2 million invested in office and supporting infrastructure.

Aphria is focused on increasing capacity and its Part III and IV expansions are currently underway. After Part IV is complete, Aphria will have production capacity of 75,000 kg and will be one of Canada’s largest producers.

Reports Strong Fourth Quarter Numbers

Today, Aphria reported its fourth quarter and full year financial results for the period that ended on May 31st. During the quarter, the company generated more than $5.7 million in revenue and reported $2.8 million in EBITDA.

This represents the seventh consecutive quarter of positive EBITDA and this number increased by more than 180% from the prior quarter and by 962% increase on a year-over-year basis. Although revenue growth was not significant when compared to the prior quarter, we expect this number to increase significantly going forward.

During the quarter, the company’s all-in cost of a gram sold decreased by more than 36% from the prior quarter and this helped support the much stronger EBITDA numbers. We think Aphria is in the middle of a major growth cycle and are favorable on the numbers reported this morning.

An Attractive Growth and Execution Story

Aphria was one of the first of the publicly traded LP’s to report positive quarterly EBITDA and has benefited from the low costs associated with greenhouse production. Aphria is strategically located in Canada’ sun belt which allows it cultivate cannabis in greenhouses and this method will continue to support Aphria as a low-cost cannabis producer.

We expect fiscal year 2018 to show significant growth and Aphria should see revenues that are twice as high as fiscal year 2017. We also expect to see margins improve which will result in much higher EBITDA.

While we are favorable on the company strategic location, it does come without risk. Since Aphria operates out of a single location, it faces overall risk due to the reliance on its facility

Cannabis Oils Represent an Attractive Opportunity

One of the best solutions for Licensed Producers when they have too much dried cannabis product is to turn it into oil. This process increases the shelf life of medical cannabis and is attractive to consumers. Cannabis oil is also a very profitable for the licensed producer. One of the most attractive aspects of the cannabis oil market is the higher price and margins associated when compared to dried cannabis.

Aphria received its license to sell medical cannabis oil in August 2016 and subsequently began to sell cannabis oils to its registered patients. Currently, Aphria has capacity to produce up to 1,200 bottles (60mL per bottle) per day.

To put this in perspective, every 6mL of cannabis oil is equivalent to 1 gram of dried cannabis, so each bottle contains 10 grams of dried medical cannabis. Aphria’s cannabis oil is priced on average of $99 per bottle, or on a dried equivalent basis of $9.90 per gram.

Demand for cannabis oils continues to increase and this is a trend we expect to continue for the foreseeable future. Aphria is positioned to capitalize off this demand we will keep an eye on how much revenue is associated with cannabis oil when the company reports earnings later this month.

Outlook is Bright

Although Aphria has been under considerable pressure, it is not unique to the company and its peers have been facing a very similar situation. We are favorable on the opportunity Aphria has to capitalize on the North American cannabis industry and believe this is a stock that needs to be watched.

We expect to see Aphria start to report stronger numbers in its current quarter and believe the stock will prove to be a second half of 2017 story. While we have concerns regarding Aphria’s greenhouse production method, the Sun Belt tends to be much warmer and have much more sun than the rest of Canada. Going forward, we would like to see the company expand its presence and not be levered to one production facility. We continue to prefer the closed box style of production. 

That being said, we believe the valuation is attractive after the recent decline and continue to see upside to current levels. Aphria is led by a management team that continues to execute and we will keep an eye on how this continues going forward. 

 

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Important Investor Disclosures 

This report was authored by and is property of Mushroomstocks.  All information and data relied upon in drafting this report is publicly available.  The author believes and considers its sources to be reliable, but does not guarantee the accuracy or completeness of any information contained in this report.  Any and all information, data, analyses and opinions are provided for informational purposes only and is not intended, in any manner, as investment advice.  Any projections or other information generated by Mushroomstocks regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.  None of the material contained in this report is intended as a solution or offer to sell or purchase a specific stock or any other investment.  This report is not directed to, or intended for distribution or use by, any person or entity that is a citizen, resident or located in any municipality, state, country or other jurisdiction where the distribution, publication, availability, or use of this report is contrary to any governing law or regulation.  The securities discussed in this report may not be eligible for purchase and/or sale in certain jurisdictions or by particular individuals.  It is important that you check any and all governing laws and/or regulations that may be applicable in your jurisdiction.  Investing in securities of issuers organized outside of the United States, including ADRs, entail certain risks.  The securities of non-United States issuers may not be registered with, nor be subject to the reporting requirements of the United States Securities and Exchange Commission.  Please contact a Financial Advisor for professional advice regarding any and all securities investments.  This report is intended for informational purposes only

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Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners, LLC and Founder of Mushroomstocks.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News, and hosts various cannabis events across North America.

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