(All prices herein are in Canadian dollars.)
(Author’s estimates; Tilray extends far off this blueprint – to ~$2,250 and ~$380; blueprint includes both bigoted and clandestine accumulation deals; allotment is allotment of Canadians in deals with bearding quantities)
Aphria (OTCQB:APHQF) is a vertically-integrated Canadian cannabis ambassador with a focus on the all-around cannabis market. Recreational cannabis will be legalized in Canada on October 17, 2018 and, based on accumulation agreements and added metrics, Aphria is acceptable to be the third-largest cannabis producer.
In its best contempo quarter, Aphria saw balance advance of 117% y/y and 11% q/q. Aphria is aggressively accretion its assembly accommodation and expects those expansions to be online in January 2019 – beforehand than expansions from aeon like Canopy Advance (CGC) and Aurora Cannabis (OTCQX:ACBFF).
In allegory to its action value, Aphria is the cheapest of the “Big Five” cannabis companies – additionally including Tilray (TLRY) and Cronos (CRON) – based on anniversary of Aphria’s EV/revenue, EV/current aggregate (in kg), EV/cannabis production, and EV/cannabis sales agreements.
One acumen Aphria may be bargain is that it is the alone aggregation of the Big Bristles that are not listed – or applying to be listed – on a US banal exchange. That may anon change with CEO Vic Neufeld suggesting a US advertisement is “hopefully” advancing soon. Rumors accept additionally swirled that Aphria may assurance a affiliation with Altria (MO), although no accord has been fabricated yet. If Aphria can acreage a ample accumulated accomplice or if Aphria is able to defended a U.S. banal listing, the aggregation may be able to aing the appraisal gap with peers.
I bulk Aphria as a buy and abide to authority shares in my Model Cannabis Portfolio in my newsletter community, The Advance Operation, and abide to authority shares in my claimed portfolio as well.
(Q1/19 Balance Release)
Aphria is a vertically-integrated cannabis ambassador based in Leamington, Ontario, Canada. It is the third-largest Canadian cannabis producer, abaft abaft alone Canopy Advance and Aurora Cannabis in assembly metrics.
On October 12, Aphria appear Q1/19 after-effects which saw Aphria’s acquirement acceleration 117% y/y to $13.3 million. Sequentially, Aphria’s acquirement rose 11% q/q from $12 actor in Q4/18. While acquirement increased, Aphria’s costs of assembly additionally added – banknote costs/gram added from $0.95/gram to $1.30/gram sequentially, and “all-in” costs added from $1.60/gram to $1.83/gram. These increases were accompanying to Aphria’s amplification – some of Aphria’s assembly accessories accept been adapted into mothering accessories to acceleration up assembly accommodation expansions. According to Aphria, this mothering about-face accounting for ~22 cents/gram of bulk increases.
I apprehend costs/gram to abatement back abounding assembly comes online in ~January 2019. Aphria currently has assembly accommodation of ~35,000 kg/year (temporarily bargain to 25,000 kg/year for mothering plants) but will admission that accommodation to ~250,000 kg/year in ~January 2019.
After affairs off its U.S. assets, there has been belief that Aphria could account on a US barter or be accountable to a accord with Altria or Diageo (DEO). For their part, Aphria has appropriate that back there is a accord in abode they will advertise it – but there’s annihilation to advertise yet on either an Altria accord or a US banal listing. That said, Aphria additionally did not abjure talks with Altria and affirmed that Aphria hopes for a US advertisement soon.
On September 28, 2018, Aphria apparent their accumulating of adult-use (recreational) cannabis brands.
These brands include:
Broken Coast Cannabis: A wholly-owned subsidiary, Broken Coast is a BC-based ability agriculturalist with a premium, award-winning product. Aphria bought Broken Coast in February 2018 for $217 million.
Aphria will additionally accommodate civic administration for We Grow, a Vancouver-based accountant ambassador of exceptional cannabis.
Aphria has a accepted anniversary assembly of ~35,000 kg/year but affairs to advancement that accommodation to 255,000 kg/year by aboriginal 2019. At the closing capacity, Aphria would be the third-largest cannabis ambassador in Canada, afterwards Canopy Advance and Aurora.
Aphria One could aftermath 30,000 kg/year of cannabis. However, the ability is actuality acclimated to mother plants which will be acclimated in Aphria One expansions alpha in January 2019. This will advance Aphria One’s admission to 110,000 kg/year, but has briefly bargain assembly to 20,000 kg/year and added Aphria’s “all-in” cost/gram to $1.83/gram from $1.60/gram aftermost quarter.
In Aphria’s Q1/19 MD&A, they acclaimed that both Aphria One and Aphria Diamond are set to appear online in January 2019. Assuming assembly comes online backward in January, Aphria ability aftermath ~236,000 kg of cannabis in 2019 – potentially added than Aurora Cannabis. (In a The Advance Operation commodity aftermost month, I estimated that Aurora would aftermath ~150,000 kg of cannabis in 2019, based on back Aurora’s accessories will be completed.)
At a broad bulk of ~$5/gram, that could betoken acquirement of ~$1.2 billion. However, CEO Vic Neufeld has accurately warned adjoin that blazon of projection:
“We are able of address far added than the Canadian bazaar – whether medical and/or recreational – will crave from us. Unless, of course, we’re activity to be aggravating to get 50% of the recreational bazaar in Canada, which would be an aberrant target.”
Vic Neufeld, Aphria CEO, on Midas Letter (~24:20), October 12, 2018
As Vic Neufeld suggest, not all Aphria’s assembly is advised for the Canadian market. In accession to Canada, Aphria additionally has all-embracing assembly and assets including:
(Q4/18 Investor Presentation; Aphria has appear added deals back then)
In best provinces, a bigoted authoritative bureau is the absolute benefactor of cannabis. Thus, accumulation agreements with the bigoted government may be acute – afterwards those deals, a company’s accessories may not be on abundance shelves in that province. For added accommodation on bigoted accumulation agreements and why I accept they matter, see “Investing In Canadian Cannabis: A Brief Primer”.
Provincial accumulation agreements: In September, Aphria appear they had completed accumulation agreements with every arena (10) and with the Yukon Territory, for a absolute of 11 accumulation agreements.
This agency that Aphria accessories will be accessible for recreational cannabis purchasers in every province, and to 99.8% of Canadians (with the actual 0.2% active in the Northwest Territory and Nunavut). Appear quantities from these deals include:
In sum, deals with appear quantities accommodate for sales of 22,250 kg/year (excluding Alberta) to ambit including 42% of Canadians. Actual quantities will vary, back anniversary accord is accounting as “up to” or “more than” rather than a accurate abundance and because alike the ambit are alone ciphering abeyant demand. Thus, these abstracts are inexactly, but can still be acclimated as an almost adviser to Aphria’s abeyant bazaar share.
Aphria additionally has clandestine accumulation agreements including:
Aphria additionally has all-embracing medical accumulation deals including Argentina, Australia, and Colombia. I don’t apprehend these all-embracing accumulation deals to abundant acquirement in the a term, but they could add cogent acquirement afterwards as those relationships complete and if those countries move appear legalizing recreational cannabis.
In my view, assets statements are not decidedly important until recreational cannabis is legalized. The acquirement reflects alone medical cannabis, and recreational cannabis will dwarf medical cannabis. Acquirement and margins will both become abundant added important already cannabis is acknowledged – we will see the absolute appeal for Aphria’s cannabis, how abundant revenue/gram Aphria can generate, and how able-bodied Aphria’s costs will calibration at accumulation assembly of over 20,000 kg/month.
I accept accent two items on Aphria’s assets statement. First, acquirement rose to $13 actor in Q1/19, up from $6 actor in Q1/18 ( 117% y/y) and up from $12 actor in Q4/18 ( 11% q/q). That acquirement advance isn’t absolute of success in recreational cannabis, but it does accommodate an adumbration that Aphria has been able to admission up their cannabis production, allure customers, and absorb those customers. That advance may additionally appearance acceptable administration – an important agency as we move appear legalization.
I accept additionally accent Aphria’s share-based advantage (“SBC”). In Q1/19, SBC was ~25% of operating expenses. This is apparently acceptable banknote administration while Aphria has a abrogating chargeless banknote flow, but it additionally agency we should clue concoction back because bazaar caps and action values.
As of August 31, Aphria had $314 actor in banknote and bankable balance and $56 actor of debt, for a net banknote position of $258 million.
This is accountable to several consecutive events:
After these deals, Aphria’s net banknote position is $340 actor including the Liberty agenda and $281 actor excluding the Liberty note.
I accept additionally accent that Aphria had $35 actor in account as of August 31, 2018 – up from $22 actor three months earlier. Best of this admission comes from added harvested cannabis and cannabis oil:
It is acceptable that all this cannabis has been sold. Vic Neufeld (Aphria CEO) has been aboveboard admiration cannabis shortages during the aboriginal few months of legalization, including at Aphria:
“‘There will be accumulation shortages in the aboriginal stages of developed use, including from Aphria, as the industry crosses a aloft articulation point,’ Vic Neufeld, CEO of the Leamington, Ontario-based pot producer, said on an balance alarm Friday. ‘There will not be complete achievement by any of the bigoted regulators out of the box. The activity ample is not activity to be there.'”
Bloomberg, October 12, 2018
In account size, Aphria ranks added amid the “Big Five” cannabis companies, as apparent beneath in “Comparison to Peers” below, although the Aurora account excludes MedReleaf.
Aphria’s $10 actor absorption in disinterestedness investees is accompanying to their advance in Althea, an Australian cannabis company. Aphria additionally has $77 actor in abiding investments on their books. Abundant of this is from an advance in banker Hiku Brands, which was (on September 5, 2018) purchased by Canopy Growth. Aphria has afterwards confused assimilate a accord with Fire & Flower, a banker that additionally has relationships with added producers as well.
In Q1/19, Aphria had a abrogating chargeless banknote breeze of ~$72 million. This abrogating chargeless banknote breeze is to be accepted at a time back Aphria is growing its assembly capabilities and above-mentioned to the amends of recreational cannabis.
Aphria’s operating banknote breeze for the division was -$14 actor while Aphria’s account levels added by $13 million. That implies that Aphria could be ~operating banknote breeze aloof alike at their accepted assembly levels.
Given that Aphria has $35 actor of accessories in their account – mostly cannabis that will be awash in Q2/19 – I apprehend Aphria will accept absolute operating banknote breeze in Q2/19 and will accept absolute chargeless banknote breeze back their expansions appear online.
Aphria has a net banknote position of ~$340 million. I apprehend Aphria to accept a absolute operating banknote breeze in Q2/19 (ending November 2018) and a absolute chargeless banknote breeze acceptable in Q3/19, back architecture on Aphria One and Aphria Diamond are both set to accomplishment in Q2/19 (according to the Q1/19 CC). Accustomed Aphria’s accepted chargeless banknote flow, Aphria should be able to complete their amplification affairs afterwards adopting added basic and potentially diluting shareholders.
As of August 31, 2018, Aphria had 232.6 actor shares outstanding. Afterwards the LATAM deal, Aphria will accept 248.3 actor shares outstanding.
Aphria added has ~12 actor options and warrants outstanding, with a abounding boilerplate bang amount of $8.78 and a abounding boilerplate continuance of 2.1 years.
Based on the Black Scholes formula, application a certain bulk of 2.5% and an adumbrated animation of 112%, these options and warrants are account ~$172 million.
Based on the above, I appraisal Aphria’s bazaar cap at ~$4.9 billion and their action bulk at ~$4.6 billion. Both abstracts abode Aphria as the fourth best admired cannabis company, abaft Canopy Growth, Tilray, and Aurora but advanced of Cronos.
(Author based on aggregation filings; date is the date of aftermost annual filings)
Aphria has the second-largest account of cannabis companies. Accustomed accumulation shortages aboriginal in legalization, account levels could accept a cogent appulse on early-legalization acquirement – all this cannabis is acceptable to be awash in the aboriginal few months afterwards amends on October 17, 2018.
Note that the abstracts for Aurora actuality do not accommodate MedReleaf – that accretion bankrupt on July 25, 2018 while the after-effects were appear on June 30.
(Quarterly acquirement and sales in best contempo quarter, in $CAD, with division end date noted)
In sales, Aphria is third in acquirement abaft both Canopy Advance and Aurora Cannabis, but hardly advanced of Tilray. If MedReleaf was included in Aurora’s figures, Aurora would beat Canopy Advance in revenue. However, Aphria is abundant abate than these companies in action value. If these abstracts are scaled to EV ratios, Aphria’s arrangement are the best of the big five:
(All ratios based on a distinct division of sales, with end date noted)
By both EV ratios, Aphria is decidedly cheaper that added “Big Five” peers. While all these companies are acutely expensive, Aphria is the cheapest of the group.
I would attention adjoin putting too abundant weight in this metric or in accepted banking ratios, about – all these abode were for abode in which recreational cannabis wasn’t acknowledged and none of the companies had abundant of their accepted assembly online. Anniversary of these companies is admired based on their abiding abeyant in the recreational cannabis barter and globally – not their medical-only sales in Canada above-mentioned to legalization. As acclaimed above, I don’t like putting a lot of weight on assets statements in general, and this blueprint is more-or-less based on an assets account – so booty it with a atom of salt.
That said, based on medical sales, Aphria is beneath big-ticket than its peers.
Aphria has the second-most accumulation agreements of any company, admitting actuality fourth in action value. These accumulation agreements will be vital, back the government is the benefactor of cannabis in best ambit – if companies do not accept a accord with that bigoted government, they will not be awash in the province.
Counting accumulation agreements may be a acceptable absorption of administration accomplishment – Aphria’s administration has been able to auspiciously accomplish deals with every distinct arena and with the Yukon Territory. Canopy Advance is the alone aggregation to bigger this total, with deals in both Nunavut and the Northwest Territories – although those two territories are home to a accumulated 0.2% of Canadians, so won’t accord a lot to top or basal lines.
By abeyant customers, Canopy Advance and Aphria are about identical – with Canopy Advance accoutrement 100% of Canadians and Aphria accepting deals accoutrement 99.8% of Canadians. Aurora and Tilray lag hardly and Cronos lags added behind.
By planned assembly capacity, Aphria ranks third amid Canadian cannabis producers abaft Canopy Advance and Aurora but advanced of all added accountant producers, including Tilray and Cronos. Notably, Aphria is additionally assured to complete their architecture eventually than aeon – Aphria’s expansions are to complete in January 2019 while Canopy Advance aims for CY19 and Aurora targets 1H/19.
Note that Tilray and Cronos are not top bristles by either metric – there are beyond producers that are not apparent here. My analysis on abate (by value) companies is begin in The Advance Operation.
(Author’s estimates; Tilray extends far off this blueprint – to ~$2,250 and ~$380; includes clandestine accumulation deals; allotment is allotment of Canadians in deals with bearding quantities)
In this chart, I analyze anniversary of the top bristles companies to their aeon in acceding of action bulk compared to both bigoted accumulation acceding quantities and compared to accepted kilograms/year of cannabis production. The allotment on this blueprint reflects the cardinal of Canadians covered by accumulation agreements that don’t yet accept appear quantities – alone about one-third of accumulation agreements (skewing to beyond deals) accept appear any minimum or best quantities. Anniversary aggregation has an ~comparable admeasurement of Canadians in ambit that aren’t included – mostly in Ontario.
Aphria is bargain on a about appraisal basis. Here, Aphria costs ~$95/gram of accumulation agreements – cheaper than any of the added four companies listed. About bisected of this accumulation is due to Aphria’s acceding with Emblem to accommodate 175,000 kg/year amid 2019 and 2024. Aphria would be alike cheaper if this blueprint included the abounding 20,000 kg/year abeyant of the Auxly accord – this includes alone 1,200 kg/year from that agreement.
Similarly, Aphria is additionally the cheapest amid the Big Bristles on a assembly basis. Aphria costs ~$18/gram of production, while Aurora is $22, Canopy Advance is $29, and the others bulk alike more.
As with any about valuation, this metric will not acquaint you if an absolute bazaar is over- or under-valued but will alone acquaint you how admired companies are compared to their peers. I would adopt to use a discounted banknote breeze or added appraisal metric, but it is difficult until we accept added advice – it would crave abounding assumptions about sales quantities, prices, and margins based on actual little information. In my view, such a assignment is abortive at this stage.
There are a few affidavit why Aphria may be cheaper than its Big Bristles peers.
First, Aphria’s banal amount may still be depressed from cabal banker allegations in March 2018 – a Seeking Alpha commodity (not my article; paywalled) begin that Aphria assembly captivated shares of Nuuvera, a aggregation that Aphria acquired. Aphria insists assembly did annihilation wrong, but the allegations of barbarism may still abnormally affect allotment prices.
If this is a acumen why Aphria shares are cheaper than peers, Aphria shares are acceptable to boring balance this arrears if administration does not ache from added impropriety. As administration continues to assassinate well, investors could re-gain their absent aplomb in Aphria and its administration – and restore Aphria to the multiples of its peers.
Second, anniversary of Aphria’s aeon – afterwards Aurora filed for an NYSE advertisement – barter on US exchanges or are in the action of acceptable U.S.-listed. Such a advertisement enables a abundant broader ambit of investors to advance in these Canadian cannabis companies, including added institutional investors and retail investors. A broader basin of abeyant investors agency that appeal for shares increases while accumulation stays connected – arch to college allotment prices and multiples.
There accept been assiduous rumors that Aphria will attack to become listed on a US exchange. Vic Neufeld has not approved to annihilate those rumors:
Host: “Will Aphria barter on a U.S. barter soon?”
Vic Neufeld: “Hopefully. It’s been on our alarm as one of our objectives … Uplisting to a aloft U.S. barter is allotment of growth, maturity.”
Midas Letter interview, October 12, 2018
If Aphria can admission a US listing, it could advice Aphria arch the appraisement gap amid it and its peers.
Similarly, if Aphria is able to acreage a big accomplice – affiliated to Canopy Growth’s accord with Constellation Brands (STZ) – that would additionally advice Aphria aing the gap in its appraisal compared to Canopy Advance and added peers. There accept been rumors of a accord amid Aphria and Altria, but no accord has been fabricated to date.
Alternatively, Aphria can artlessly aftermath acceptable after-effects afterwards amends to dness these appraisement differences. I doubtable that already recreational cannabis is acknowledged – abnormally afterwards a brace abode of post-recreational balance – companies will be priced added analogously to anniversary added than they are today. This may be abnormally accurate if, as I advance above, Aphria produces decidedly added cannabis than Aurora in 2019.
Any advance in cannabis is risky. The industry is new, and no one has anytime developed cannabis on this calibration before. Execution risks – such as crop failures or difficulties with administration – are likely. Investors should advance carefully and with those risks in mind: Choose advance sizes with ability of the risks complex in these investments. Shares of cannabis companies can acceleration and abatement a continued way in a trading day and over time.
I apprehend abiding assets in the cannabis market. However, those assets may booty years to actualize as this beginning bazaar matures and as all-embracing markets open. Thus, I acclaim that new investors:
After aboriginal division earnings, I abide to bulk Aphria as a buy. I accept that Aphria is a acceptable captivation in a adapted cannabis portfolio such as my Model Cannabis Portfolio in The Advance Operation. I abide to authority shares in my claimed portfolio as well.
Aphria’s amplification projects – both Aphria One and Aphria Diamond – are on clue to be completed afore the commensurable expansions of Canopy Advance and Aurora. This aboriginal achievement will advice Aphria aftermath arch after-effects in 2019 – abnormally accustomed that both Aphria and Canopy Advance apprehend a cannabis curtailment aboriginal on in legalization. Based on achievement timing of Aphria and Aurora, Aphria may alike out-produce Aurora in 2019.
Further, Aphria is priced beneath added “Big Five” aeon in action value-based metrics. This appraisement cogwheel may achromatize over time, abnormally if Aphria is able to defended a US banal listing, if Aphria can acreage a ample accumulated partnership, and if Aphria can bear accomplished after-effects already its expansions appear online aboriginal in 2019.
I bulk Aphria as a buy and plan to advance my position in the company.
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Membership is on appropriate this ages only, and prices are activity to acceleration aing month, so assurance up for a chargeless balloon today. (If prices acceleration later, aboriginal associates get grandfathered prices, forever.)
Disclosure: I am/we are continued APHRIA, CANOPY GROWTH, AURORA CANNABIS.
I wrote this commodity myself, and it expresses my own opinions. I am not accepting advantage for it (other than from Seeking Alpha). I accept no business accord with any aggregation whose banal is mentioned in this article.
Editor’s Note: This commodity discusses one or added balance that do not barter on a aloft U.S. exchange. Please be acquainted of the risks associated with these stocks.
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