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Aphria Looks Attractive in the Cannabis Space

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  • Aphria sales grew by approximately 20% in the third quarter.
  • The company has reported a positive EBITDA in the past four quarters. Currently, many cannabis companies have struggled to become profitable.
  • Aphria’s balance sheet looks strong.

So far in 2020, the cannabis sector has underperformed the broader equity markets. YTD, the ETFMG Alternative Harvest ETF (NYSE:MJ) has declined by 30.2%, while the S&P 500 Index has fallen by 12.0%. Weaker-than-expected demand for recreational cannabis, the slow rollout of retail outlets in Canada, thriving black market sales, and rising operating losses dragged the cannabis sector down. Meanwhile, Aphria has lost 26.3% of its stock value this year. The stock has underperformed the broader equity market. However, I think that the company could outperform its peers going forward.

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Aphria’s revenue rose by double-digits

In the latest quarter, which ended on February 29, Aphria reported sequential revenue growth of 19.8% to 144.4 million Canadian dollars. The growth in cannabis product sales drove the company’s revenue. During the quarter, the company’s sales from the Cannabis Products segment grew 62% to 64.4 million Canadian dollars. The company sold 8,171 kilogram equivalents of adult-use cannabis and 1,352 kilogram equivalents of medical cannabis. Compared to the previous quarter, the company’s adult-use cannabis sales grew by 46.8%, while medical sales increased by 9.3%.

The increase in cannabis sales to provincial control boards and an increase in market share drove the company’s cannabis sales. The company owns the Solei, RIFF, Good Supply, and Broken Coast brands in the adult-use segment and the Aphria brand in the Medical segment. With Aphria’s differentiated portfolio of brands, it looks to meet customers’ varying needs.

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Four consecutive quarters of positive EBITDA

Aphria reported an adjusted EBITDA of $5.7 million in the third quarter. The company has reported a positive EBITDA for four consecutive quarters. Meanwhile, the third-quarter adjusted EBITDA grew 200% from 1.9 billion in the second quarter. The EBITDA growth in the Cannabis Products segment and the Distribution segment drove the company’s EBITDA segment. Also, during the quarter, the EBITDA loss from businesses under development declined, which drove the company’s EBITDA growth.

Due to a delay in receiving approval for the Aphria Diamond facility, the demand exceeded the company’s supply capabilities. So, the company purchased 20.2 million Canadian dollars worth of cannabis from licensed producers. Aphria claimed that the purchases from external suppliers lowered its gross profits and adjusted EBITDA by 7.6 million Canadian dollars. So, we can expect an additional improvement in Aphria’s EBITDA going forward since it has expanded its production capacity.

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In the third quarter, Aphria licensed its Aphria One and Aphria Diamond facilities. They were operating at 100% capacity. The company’s management added that Aphria Diamond can produce cannabis at a rate of 175,000 kilograms per year. So, the completion of the Aphria Diamond facility helped the company reduce its total cash cost per gram to 0.93 Canadian dollars per gram compared to 1.11 Canadian dollars per gram in the second quarter.

Aphria’s stock balance sheet

By the end of the third quarter, Aphria had 515.1 million in cash and cash equivalents—an increase of 17.4 million Canadian dollars compared to the previous quarter. During the quarter, the company raised 100 million Canadian dollars through equity offerings. Although the company paused its capital expenditure projects, it expects to spend approximately 30 million Canadian dollars on its German expansion and 40 million Canadian dollars on its Colombian expansion. Aphria expects the working capital investments to be 25 million–50 million Canadian dollars. So, excluding these expenses, management has 400 million Canadian dollars and cash generated for its operations to fund its future growth initiatives.

My take

Overall, I’m bullish on Aphria. Through differentiated products and strong brands, the company’s sales could rise. Also, the company wants to expand its portfolio by launching edibles, beverages, and topical products in the future. The company has expanded its cultivation capacity with Aphria One and Aphria Diamond operating at full capacity. So, I expect the company’s sales to rise going forward.

Since Aphria Diamond has started operating at full capacity, its cash cost per gram could decline more. With increased production capacity, Aphria will be able to meet the demand from its supplies, which could improve its margins. Also, I think that the company has enough cash to fund its expansion plans going forward. With many companies struggling to raise cash, I think that Aphria is in a strong position to gain market share from them. So, investors should look to accumulate the stock on every dip. For analysts’ reaction after the company reported its third-quarter earnings, read Why Analysts Had Mixed Reactions to Aphria’s Q3 Earnings.

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