APHQF Stock Forecast
Investors in Aphria Inc (OTCMKTS:APHQF, TSE:APH) have been on a roller-coaster ride in 2018. Over the first eight months of the year, Aphria’s share price tumbled 55.6%.
Since then, however, Aphria stock has rebounded, in large part because of solid first-quarter results, a potential partnership with tobacco giant Altria Group Inc (NYSE:MO), and its upcoming listing on the New York Stock Exchange (NYSE).
With all that, the robust APHQF stock forecast remains safe.
Aphria’s Q1 2019 Earnings
Recreational marijuana use is now officially legal in Canada. Gone are the days of cannabis companies relying solely on medical marijuana sales to juice their earnings. Going forward, pure-play marijuana stocks have to prove that their lofty valuations have been worth the hype.
On October 12, Aphria announced its financial results for the first quarter of fiscal-year 2019, ended August 31, 2018. It should be noted that this is the last quarter that Aphria announced results as a pure-play medicinal cannabis company.
Aphria’s revenue for the first quarter increased 10% sequentially to CA$13,292, which is up 117% year-over-year. (Source: “Aphria Records Solid Revenue Growth in First Quarter of 2019,” Aphria Inc, October 12, 2018.)
After 11 consecutive quarters of positive operating earnings, Aphria reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss from Access to Cannabis for Medical Purposes Regulations (ACMPR) operations of CA$828.00.
While some investors may see this as cause for concern, it isn’t. It’s a reflection of expansion costs related to the legalization of recreational marijuana.
First-quarter net income was CA$21,176 (CA$0.09 per share), compared to CA$15,041 (CA$0.11 per share) in the same prior-year period.
The company’s cash cost to produce cannabis increased to CA$1.30 per gram in the first quarter of 2018, compared to CA$0.95 per gram in the fourth quarter of 2017, but this sharp increase is likely a short-term development linked to the rollout of recreational marijuana legalization in Canada.
Aphria noted that it is moving forward with its automation infrastructure, which is expected to lower the company’s per-gram cash costs in 2019. This would give Aphria a competitive advantage.
|Q1 Ended August 31, 2018||(All dollar figures are in CA$)||Q1 Ended August 31, 2017|
|Q1 2019||Q4 2018|
|$1.30||Cash Cost to Produce Dried Cannabis per Gram||$0.95|
|$1.83||“All-In” Cost of Goods Sold per Gram||$1.60|
|$313,982||Cash & Cash Equivalents & Marketable Securities||$104,799|
|$28,036||Investments in Capital & Intangible Assets||$39,042|
Aphria’s annual production capacity in Canada is currently 30,000 kilograms (around 66,000 pounds) at Aphria One and 5,000 kilograms (around 11,000 pounds) at Broken Coast.
The company’s Canadian-based production capacity remains on schedule to reach 255,000 kilograms (around 562,000 pounds) annually.
During the first quarter of 2019, Aphria launched the company’s initial portfolio of adult-use brands “Solei Sungrown Cannabis,” “RIFF,” “Good Supply,” and “Goodfields.”
To that end, Aphria has signed supply agreements with every provincial government in Canada (and the Yukon territory). The company’s distribution channels now access 99.8% of the Canadian population.
Big Tobacco Partnership and Possible Big Alcohol Partnership
A number of potential partnerships could boost Aphria’s bottom line and give shareholders additional reasons to cheer.
Altria Group, the U.S. tobacco giant behind the “Marlboro,” “Copenhagen,” and “Skoal” brands, is reportedly in talks to buy a stake in Aphria.
What that equity stake could look like remains to be seen. Inside sources say Altria is only looking to buy a minority stake in Aphria, with the intention of being a majority shareholder. (Source: “Marlboro maker Altria in talks with Canadian pot grower Aphria,” The Globe and Mail, October 10, 2018.)
With the once-mighty tobacco industry bleeding customers, it’s possible that Altria could even buy out Aphria at some point.
It seems that a partnership between the two companies is imminent though. Sources said that senior representatives from Altria have made trips from Richmond, Virginia to Aphria’s headquarters in the sleepy town of Leamington, Ontario.
Altria is not the only partnership that Aphria has been considering. Aphria has allegedly been in discussions with the London, England-based Diageo plc (NYSE:DEO). Diageo’s brands include “Smirnoff,” “Johnnie Walker,” “Baileys,” and “Guinness.” It also owns a minority stake in Moët Hennessy.
A potential partnership with Diageo might be fueled by more than just rumors and speculation. Aphria will be holding its annual meeting on November 2. It is here that the company will be nominating Tom Looney to its board of directors. Looney is the recently retired president of Diageo U.S. spirits and Canada.
On top of that, Aphria’s Chief Commercial Officer, Jakob Ripshtein, is a former CFO of Diageo North America and former president of Diageo Canada.
Aphria NYSE Listing Should Help With Volume and Valuation
Most marijuana stocks are listed on Canadian exchanges because medicinal marijuana has been legal in Canada since 2001. This has given cannabis companies almost two decades to build out their infrastructure, production, and partnerships.
Unfortunately, most weed stocks trade exclusively in Canada, and most American investors do not buy Canadian marijuana stocks. It doesn’t help that marijuana remains federally illegal in the U.S.
That said, Canadian pot stocks that trade on U.S. exchanges, like Tilray Inc (NASDAQ:TLRY), Cronos Group Inc (NASDAQ:CRON), and Canopy Growth Corp (NYSE:CGC) have all benefited from U.S. exposure.
Aphria is about to join that group. The company recently filed to list its stock in the U.S., but it has not yet set a date.
In addition to leading to broader exposure and a boost in trading volume, listing on the NYSE should help with Aphria’s valuation. According to one report, U.S.-listed pot stocks trade at 37 times the enterprise value to 2020 EBITDA versus 12 times for the eight biggest Canada-listed cannabis stocks. (Source: “Aurora, Aphria NYSE Listings Should Boost Volumes and Valuation,” Bloomberg, October 23, 2018.)
The report’s author noted that he sees a 200%–400% upside for marijuana companies like Hexo Corp (TSE:HEXO), Organigram Holdings Inc (OTCMKTS:OGRMF, CVE:OGI), and CannTrust Holdings Inc (OTCMKTS:CNTTF, TSE:TRST) if they list in the U.S.
Correlation is not causation, but there’s no reason why a financially robust Canadian cannabis company with access to 99.8% of the Canadian population, like Aphria, shouldn’t benefit on every level once it starts trading on the NYSE.
Aphria’s share price has made great strides since bottoming in August. That said, at CA$15.53 per share, it’s still down 20% from where it started in 2018. That has less to do with Aphria’s business model and financials than with the broader market decline and concerns about slower earnings growth and rising interest rates.
The APHQF stock forecast remains strong, and 2019 could be a monumental year for Aphria. Listing on the NYSE will give it immediate exposure to American investors and should help increase its valuation.
Moreover, should the partnerships with Altria and/or Diageo come to fruition, Aphria’s stock forecast will become even more bullish.
For now though, Aphria stock’s recent pullback, which is following the broader market trend, has put the company in a good price range—especially for investors who say there are few fairly valued marijuana stocks.
Aphria continues to have tremendous upside potential, and a move to CA$22.00 per share in the coming months is not out of the question.