9 Sep

Aphria versus Aurora Cannabis: A Valuation Update

WRITTEN BY Rajiv Nanjapla

Since the beginning of August, Aphria (APHA) and Aurora Cannabis (ACB) have returned 30.0% and -2.7%, respectively.

Aphria and Aurora Cannabis’s stock performance

Aphria reported a strong fourth-quarter performance on August 1. For the fourth quarter, the company beat analysts’ top-line and bottom-line expectations. The company’s net profits were 15.8 million Canadian dollars—compared to analysts’ expectation of a loss of 13.9 million Canadian dollars. The impressive fourth-quarter performance caused Aphria’s stock price to rise. On August 22, the company announced a distribution agreement with ParcelPal Technology. According to the deal, ParcelPal will deliver Aphria’s medical cannabis products to patients. The two companies have selected Calgary, Alberta, to launch their delivery service.

On August 6, Aurora Cannabis’s management provided better-than-expected guidance for its fourth quarter. The company also completed its acquisition of Hempco Food and Fiber on August 19. We expect Hempco’s acquisition to expand Aurora Cannabis’s hemp business in the US. On September 4, Aurora Cannabis sold its stake in Green Organic Dutchman Holdings (TGOD) for 86.5 million Canadian dollars. The company earned a 50% internal rate of return by selling its Green Organic Dutchman shares. Despite all of these announcements, Aurora Cannabis stock has fallen 2.7% since July 31. Weakness in the cannabis sector led to a fall in the company’s stock price. During the same period, the ETFMG Alternative Harvest ETF (MJ) and the Horizons Marijuana Life Sciences Index ETF (HMMJ) have fallen 8.4% and 6.4%, respectively. Despite the fall, Aurora Cannabis has returned 18.3% YTD, while Aphria stock has increased 18.6%.

Aphria versus Aurora Cannabis: A Valuation Update

Comparing the EV-to-sales multiples

Although Aphria stock has increased 30%, its forward EV-to-sales multiple fell from 2.53x on July 31 to 2.39x on September 6. The impressive fourth-quarter performance appears to have prompted analysts to raise their revenue expectations for the next four quarters. The higher revenue estimates lowered Aphria’s forward EV-to-sales multiple. The company was trading at a lower valuation multiple compared to its forward EV-to-sales multiple of 2.76 at the beginning of this year and its historical average forward EV-to-sales multiple of 8.90x.

On September 6, Aurora Cannabis was trading at a forward EV-to-sales multiple of 11.77x compared to 12.07x on July 31. The decline of 2.7% is Aurora Cannabis’s stock price led to a fall in its EV-to-sales multiple. There wasn’t much change in analysts’ revenue expectations for the next four quarters from July 31 to September 6. However, the company is trading at a higher EV-to-sales multiple compared to 7.58x at the beginning of 2019 and its historical average of 10.48x.

In the above graph, you can see that Aurora Cannabis is trading above its peers’ median value of 4.74x. In contrast, Aphria is trading below its peers’ median value.

Aphria versus Aurora Cannabis: A Valuation Update

Forward EV-to-EBITDA multiples

The better-than-expected adjusted EBITDA in the fourth quarter might have prompted analysts to raise their EBITDA estimates for the next four quarters. The increase in analysts’ EBITDA estimates brought Aphria’s EV-to-EBITDA multiple down. As of September 6, the company was trading at a forward EV-to-EBITDA multiple of 12.86x compared to 33.24x on July 31. Currently, Aphria trades at a higher EV-to-EBITDA multiple compared to 9.58x at the beginning of this year and lower than its historical average EV-to-EBITDA multiple of 28.57x.

Analysts lowered their EBITDA estimates for Aurora Cannabis in the next four quarters compared to their estimates on July 31. The lower EBITDA estimates led to an increase in the company’s valuation multiple. On September 6, the company was trading at a forward EV-to-EBITDA multiple of 58.68x compared to 49.77x on July 31. Aurora Cannabis is trading above the forward EV-to-EBITDA multiple of 26.47x at the beginning of 2019 and its historical average of 34.45x.

On September 6, Aurora Cannabis and Aphria were trading at higher forward EV-to-sales multiples than peers’ median value of 12.26.

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