Our Analysis of Aphria’s Fiscal 2020 First-Quarter Results



Aphria (APHA) emerged as one of the stronger cannabis companies in the latest earnings season. And since then, its stock has been more resilient than peers Aurora Cannabis (ACB), Canopy Growth (CGC), HEXO (HEXO), Cronos Group (CRON), and Tilray.

Year-to-date, APHA is down 20.21% on the NYSE and 26.26% on the Toronto Stock Exchange. Meanwhile, ACB, CGC, HEXO, CRON, and TLRY are down 51.81%, 32.60%, 40.82%, 35.13%, and 71.58%, respectively, on US exchanges. Let’s see if Aphria’s Q3 financial results justify its stock’s strength.

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Aphria reported positive EBITDA in two consecutive quarters

In fiscal 2020’s first quarter, Aphria’s revenue was 126.1 million Canadian dollars, representing an 849% YoY (year-over-year) rise but a 2% sequential decline. APHA’s first-quarter revenue also fell short of analysts’ estimate of 132.2 million Canadian dollars. While the company’s cannabis revenue rose sequentially from $28.6 million to $30.8 million, its distribution revenue fell sequentially from $99.2 million to $95.3 million. The company attributed this decline to changes in the business strategy of its subsidiary, CC Pharma, after the German government updated its reimbursement model for medical marijuana. CC Pharma’s strategy seems to be paying off, considering that its gross margins and EBITDA strengthened in the first quarter. A fire at Aphria’s Broken Coast facility in British Columbia also pulled down its first-quarter revenue by 1.5 million Canadian dollars.

APHA’s first-quarter EBITDA of 1.0 million Canadian dollars, however, surpassed analysts’ estimate of -2.2 million Canadian dollars. The company marked its second straight quarter of positive EBITDA.

In comparison, Aurora reported an EBITDA loss of 39.7 million Canadian dollars in the first quarter, and Canopy reported an EBITDA loss of $155.7 million Canadian dollars in the second quarter. These losses came despite ACB and CGC having larger market capitalization and higher cannabis production capacities than APHA.

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One-time event boosted Aphria’s company’s net income

Aphria’s first-quarter EPS of 0.07 Canadian dollars were significantly higher than analysts’ estimate of 0.02 Canadian dollars, thanks to an increase in gross profits and a drop in selling, general, and administrative expenses. Aphria’s net fair value adjustment of inventory and biological assets has been a major profit driver.

The company has a broad presence in international markets

In May, Aphria secured a fifth medical cannabis cultivation license from the German Federal Institute for Drugs and Medical Devices. The company won the most licenses in the German tender process, and has become the only licensed producer that can grow all three strains of medical marijuana in Germany. In its first-quarter earnings call, the company said it aims to supply Germany with its first domestically grown medical cannabis from its Neumünster cultivation facility in late 2020.

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In its first-quarter earnings call, Aphria also said it aims to become a dominant cannabis company in Colombia. To that effect, it’s building a greenhouse facility in the country, with GMP (good manufacturing practice)-compliant cultivation and processing capabilities. The company also aims to leverage the facility’s low-cost production to expand in Latin America. In January, Aphria’s Colombian subsidiary, Colcanna SAS, partnered with Federación Médica Colombiana to develop an academic curriculum for medical marijuana. This partnership has given the company direct access to more than 70,000 physicians and medical professionals.

Aphria is facing pricing pressure

In the first quarter, Aphria’s average selling price for recreational marijuana rose by 5.06% to 6.02 Canadian dollars per gram. However, its average selling price for medical marijuana fell 1.31% to 7.56 Canadian dollars. Aphria reported it sold 3,317-kilogram equivalents of recreational marijuana and 1,354-kilogram equivalents of medical marijuana. The company’s marijuana sales rose 7% YoY in the first quarter, to 5,969-kilogram equivalents.

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The demand-supply mismatch may lower APHA’s selling prices in Canada

Aphria is working to expand its annual production capacity in Canada to 255,000 kilograms. Peers ACB, CGC, and CRON have also significantly increased their production capacity. However, as reported by BNN Bloomberg, Canadian demand for legal recreational marijuana has fallen short of projections. Cannabis Benchmarks estimates sales could reach 1.1 billion Canadian dollars in the first full year of adult-use cannabis legalization. Additionally, the thriving black market and limited retail footprint for legal cannabis could further pressure Aphria.

Aphria may need to write down goodwill in future quarters

As reported by MarketWatch, before APHA’s fourth-quarter earnings release, CIBC World Markets analyst John Zamparo expressed the possibility of large goodwill write-down for Aphria. The analyst is concerned about Aphria’s acquisition of Nuuvera in 2018, when cannabis companies were trading at peak valuation. The deal was closed in March 2018 at 425 million Canadian dollars, nearly half its original valuation in January 2018.

Aphria had goodwill of 669.62 million Canadian dollars on its balance sheet at the end of the first quarter, and 669.85 million Canadian dollars at the end of the fourth quarter. Therefore, the risk of a substantial goodwill write-down remains.

The company has guided for robust fiscal 2020 revenue and earnings

In its first-quarter earnings call, Aphria guided for fiscal 2020 net revenue of 650 million–700 million Canadian dollars. The company expects distribution revenue to account for more than 50% of its total revenue. The company also guided for annualized Canadian cannabis sales of 500 million Canadian dollars, assuming that all of APHA’s facilities become fully operational. Additionally, Aphria expects to report annualized revenue of 1 billion Canadian dollars by the end of the fourth quarter.

Aphria has forecast fiscal 2020 EBITDA of 88 million–95 million Canadian dollars. This guidance is notable considering the small chances of ACB and CGC becoming EBITDA positive in fiscal 2020.


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