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Aphria Inc. Is Making A Strong Case For King Amongst The Canadian Licensed Producers

Oct 15, 2019 • 11:19 AM EDT
3 MIN READ  •  By Michael Berger
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The last few months have been rough for the cannabis industry and Canadian Licensed Producers (LPs) have been heavily impacted by the recent decline. Valuations for leading Canadian LPs have plunged over the last quarter and this is a trend that we have been closely following.

A few months ago, Aphria (APHA.TO) (APHA) released fourth-quarter financial results that came in well above expectations and this served as a catalyst for the entire sector. Today, the leading Canadian LP reported first quarter financial results that showed impressive growth and we will monitor how the market responds to these numbers.

During the quarter, the Canadian cannabis producer recorded $16.5 million of net income on more than $126 million of revenue. When compared to the same period last year, total revenue increased by approx. 850% and this represents massive growth. Aphria reported a second consecutive quarter of profitable growth with strong contribution from its Canadian cannabis operations. The success during the quarter was driven by the international side of the business and the strength and growth of its brands.

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Reiterates 2020 Growth Outlook

Aphria reiterated its 2020 outlook and we are bullish on the growth prospects associated with the global cannabis company. Going forward, the management team is focused on high-margin verticals within the industry while also being focused on the development of its cannabis brands to drive growth through innovation.

When compared to the prior quarter, Aphria reported lower revenues and the decrease can be attributed to a change in business strategy at CC Pharma after recent changes in the German government’s medical reimbursement model. The decrease in distribution revenue was partially offset by an increase in net cannabis revenue and we find this to be significant. Going forward, we expect to see Aphria report ramping cannabis revenues and believe that the business represents a multi-faceted growth opportunity.

When analyzing Aphria, we believe that the strength of the balance sheet will play a key role in the success of the operation and find this to be significant. The Canadian cannabis producer ended the quarter with $464.3 million of cash, cash equivalents and liquid marketable securities, to fund planned Canadian and International growth. Going forward, we expect to see the company put the capital to work in ways that are accretive to the business and are bullish on this aspect of the story.

The market has responded favorably to Aphria’s first quarter financial results and the shares jumped higher in the pre-market. After the company reported its fourth quarter financial results, we noticed a similar response and believe that investors need to be aware of this report.

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We Find the Risk-Reward to be More Attractive Following this Report

At current levels, we find the valuations of leading Canadian LPs to be much more attractive (on average) and believe that company fundamentals have been steadily improving. Although these companies are not yet profitable (on average), we have seen a significant improvements over the last year from a revenue and from a margin standpoint and  believe that this is a trend that investors need to be aware of.

Over the next few weeks, we expect to see several leading Canadian LPs report quarterly financial results and will be watching how these companies grow on a quarter-over-quarter basis. When looking at the Canadian recreational cannabis market, there is a lot to be excited about as new products are approved to be sold to consumers. We expect this to be a catalyst for future quarters and are bullish on the growth prospects associated with this trend.

To learn more about Aphria and other companies that are levered to this aspect of the Canadian cannabis industry, please reach out to support@technical420.com to be added to our distribution list.

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Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.

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