Aphria Stock – Latest Trends and Insights November 2019

The Aphria stock has been on a tear lately. The company is one of Canada's big three Licensed Producers behind Canopy Growth and Aurora Cannabis.

Aphria (NYSE:APHA) stock's vision is to be the best performing cannabis company globally, providing investors with access to one of the most accretive cannabis opportunities around the world. 

According to the company, they believe they are differentiated because of their strong branded positioning, extensive distribution model in Canada, industrial-scale cultivation facilities, and significant global reach.

Aphria Stock Global Operations
Source: Company Presentation

Although Aphria operates across multiple continents, their primary market (and revenue-generating base) is Canada, followed by Germany. Just last year, Aphria purchased CC Pharma, a German pharmaceutical distributor, for €48 million ($70 million). CC Pharma makes up about three-quarters of Aphria's revenue while Canadian cannabis sales make up the remainder.

Aphria's Business Operations in Canada

Aphria stock has an extensive distribution model in Canada covering both the medicinal and recreational markets. When it comes to the adult-use market, the company has supply agreements with every Canadian Province and the Yukon territory (giving it access to 99.78% of the Canadian population). 

They also have a distribution agreement with Southern Glazer's Wine and Spirits – North America's largest wine and sprites distributor. This exclusive distribution agreement gives the company the ability to leverage operations in every province across Canada and potentially benefit from operations in the U.S. (Southern Glazer operates in 44 states plus the District of Columbia), and the Caribbean.

On the medicine side, they have a distribution agreement with Shoppers Drug Mart – one of the top retail pharmacies in Canada – which also provides access to an online sales channel (ie direct to consumers). Aphria also has its own direct to consumer sales channel through telephone and their online website.

Aphria's German Operations

Aphria Stock German Strategy and Operations

The Aphria stock is well placed to service one of the largest medicinal cannabis markets in the world – Germany. With one of only three companies to be awarded import supply agreements to Germany and the approval and license for on the ground production via its Deutschland indoor facility, the company continues to strengthen its market position in a very, very lucrative market.

Aphria's Facilities and Production capacity

Recently, Health Canada fully licensed the Aphria Diamond facility for cultivation. This now brings online their biggest cultivation facility and brings total annualised capacity to the much-publicised 255K. Kg per annum. This places Aphria stock as the third-largest producer by capacity behind Canopy Growth and Aurora Cannabis. 

Aphria Stock Cultivation footprint and capacity

In addition to the large scale, low-cost cannabis production, the company also has the premium-grade medicinal production via its Broken Coast operation. Already considered by many as some of the most premium grade flower in the industry, this gives Aphria coverage on both sides of the flower market and ensures they have a product that will hold its value in the coming years. 

Aphria Stock Global supply partners

The company also has international supply agreements with companies across the globe. This is another positive indication that their global strategy is not only working but revenue-producing. Aphria stock is also building an Extraction Centre of Excellence to extract cannabinoids at scale without having to use an outside extraction company like Valens GroWorks or MediPharm Labs.

So with all of the above, the big question that our readers have been asking is:

Why is the Aphria stock dropping?

The Aphria stock price has been in freewill since the disastrous Hindenburg short-sell report that was put out late last year. The report spoke of insider and related-party dealings in the purchase of the LATAM assets. It also spoke of poor cannabis quality and a conflicted management team. However, the company has come a long way since then and this is born out in the recent financial results.

Financial Overview for Aphria

Aphria reported fiscal 2020 Q1 results which showed stalling cannabis sales and a slight decrease in the distribution business. The company reported total revenue of $126 million which was a decline on the $129 million reported in the previous quarter. The bulk of their revenue is coming from their German subsidiary –  CC Pharma – which is a distribution business characterised by low margins, which ultimately adds little value to the company.

Aphria Stock Financial Results Q1 2020
Source: The Growth Operation

APHA posted a modest increase in cannabis sales of 7% quarter on quarter. The primary reason for the increase was the wholesale cannabis sales to Alefia – who have now subsequently cancelled their long-term supply agreement – for 175K kg over 5 years – with the reason stated as being Aphria stock's lack of supply under the terms of the agreement.

In all honesty, this was a termination well in the making. The original supply agreement was made between Aphria stock and Emblem. Subsequently, Aleafia purchased Emblem, and with their production capacity, made the supply agreement redundant in nature. 

Through the four months to the end of the August quarter, APHA has supplied only 2,226 kilograms of cannabis. At most, they were on pace to sell Aleafia 6,700 kilograms of cannabis in the first year, assuming that Aphria had no other wholesale sales. This is far short of the contractual 25,000 kilograms.

This shortfall is likely due to Aphria stock's relatively constricted cultivation capacity – they were unable to produce cannabis as quickly as they were contractually required. Given their ability to produce their own cannabis, and hence capture the full margins, it really came as no surprise to the market that Aleafia terminated the agreement.

Although expected, the impact of the terminated agreement is significant to the Aphria stock. At the low end of the wholesale pricing,  the agreement could have generated in the region of $500 million in sales to APHA, which (if margins were improved through additional capacity and economies of scale) might have ended up generating over $300 million in gross profit over the 5-year term. This would have gone a long way to helping Aphria achieve their very aggressive guidance, which of course will drive the Aphria Stock price.

The APHA FY2020 Revenue Guidance

During the recent earnings call, APHA reiterated its fiscal 2020 guidance including:

  • Net revenue of $650-$700 million, roughly evenly split between the distribution and cannabis business
  • Adjusted EBITDA of $88-$95 million

The guidance implies cannabis sales of around $245 million for the remaining 3 quarters and is primarily predicated on the sales of edibles and extracts in coming quarters.

Aphria Stock Revenue and profitability guidance for 2020
Source: The Growth Operation

These numbers are extremely aggressive in nature if one considers that in the current quarter cannabis sales totalled $31 million, then in order to meet the guidance, the APHA will need to increase that to at least $100 million per quarter for the next 3 quarters. With Canadian sales getting off to a very slow start, the roll-out of additional retail stores taking far longer than anyone expected, and medical sales across Canada plateauing, it would be an unbelievable achievement if the APHA was actually able to deliver, given that equates to around 50% quarter on quarter growth.

One also need to consider the very real risk that the company does not meet its guidance, and if this plays out and based on how the market reacted to HEXO significantly missing their guidance, there exists a real opportunity of the share price being put under significant pressure.

One major positive for the company is their balance sheet. In the current capital crunch, cash is king, and in this regard, the Aphria stock can be considered royalty. With ending balance of $464 million, the company is the third most capitalised company after Canopy Growth and Cronos – both of which benefits from billion-dollar investments from third parties. 

We ended the quarter with a strong balance sheet and a cash position including $464 million of cash and marketable securities, as they say, cash is king.

Irwin Simon Aphria CEO

In summary, the quarter could be considered fair, but importantly was given the recognition by the market with shares gaining over 25% on the day, in a market that has historically punished companies post their earnings releases.

What's been happening in Aphria's Business

Aphria Diamond Receives Cultivation License – Aphria has received a cultivation license from Health Canada for the Company's second greenhouse, Aphria Diamond.

Aphria Begins Delivering Medicinal Marijuana – Aphria will be providing its cannabis products for purchase online, with ParcelPal in charge of distribution, leveraging its delivery apps.

Jamaican Me Stoned: Aphria Subsidiary Opens Store in Jamaica – Aphria announced that its subsidiary Marigold Projects was granted a retail Herb House licence from Jamaica's licensing authorities, enabling the company to open its first retail store in Kingston.

Aphria Launches its Social Impact Platform 'Plant Positivity' – Aphria announced the launch of its new social impact platform, Plant Positivity, which builds on the company's Corporate Social Responsibility strategy, whose ultimate aim is to give back to the communities and land that the company operates from

The bottom line

The Aphria stock price has come a long way since the devastating Hindenburg short report that tore it to pieces in December 2018. After major changes to the board which included the departure of then CEO, Vic Neufeld, the new CEO, Irwin Simon, has done a very good job of steadying the ship and getting the company moving in the right direction again. However, there is still much work to be done.

We see the most significant risk in the near term of Aphria not meeting its guidance and the potential impact this will have on the Aphria stock price. Should the company be able to move the dial significantly in the coming quarter and show even a slight path to this guidance, then we believe there is massive upside to the current price.

Is Aphria a good stock to buy?

With a solid cash balance, the third-largest production run rate in the industry, and a global market presence that is already revenue-generating, the current market valuation make it a very attractive company for investors looking for significant upside in the Aphria stock price. 

However, investors should be mindful fo the fact that with such aggressive 2020 guidance, the company is opening itself up to potential failure which could lead to a very significant fall in the share price. However, guidance aside, we believe the company is well-positioned to take advantage of an expanding Canadian recreational market and are very bullish on the stock.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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