The market did not respond favorably to Aphria’s (APHA.TO) (APHA) third quarter earnings report and the stock ended the day in negative territory…
Although the response from the market was negative, we believe the business is well positioned for long-term growth. After the earnings report, Aphria’s management team said that approx. 90% of shareholders have already voted in favor of the merger with Tilray, Inc. (TLRY) and we are bullish on the growth prospects that are associated with the combined company. There is now only one major hurdle in the way to complete the transaction – the Tilray shareholder vote on April 30th.
During the third quarter, Aphria was negatively impacted by provincial lockdowns and we believe the street underestimated this headwind. The company’s CFO stated that the business was also negatively impacted by price compression. This headwind is expected to be an ongoing issue for Canadian Licensed Producers (LPs).
Going forward, we expect to see Canadian LPs that closed facilities and cut expenses in order to be better aligned with consumer demand to outperform the LPs that did not act on this. Large scale LPs that did not close facilities are expected to face massive cash burns and we prefer businesses that have their finger on the pulse of the legal cannabis market.
The international cannabis industry is still in the early innings of a major growth cycle and we prefer Canadian LPs that are levered to markets like the European Union (EU), the United States (US), and certain markets in Latin America. We believe the economics that are associated with these markets to be more attractive and expect these markets to play an important role in managing price compression in Canada.
One of the primary reasons for our favorable view on the combination of Aphria and Tilray is related to the amount of leverage that it has to the EU. Going forward, we expect the EU cannabis industry to record incremental growth as new markets open and existing markets grow. We are bullish on the opportunity for Aphria and Tilray to capitalize on Germany and capture additional market share in strategic US markets.
In the near future, we expect the merger between Aphria and Tilray to close and expect the combined company to compete with large-scale Canadian LPs such as Canopy Growth Corporation (WEED.TO) (CGC) and Aurora Cannabis Inc. (ACB.TO) (ACB).
We are not surprised to see Aphria pullback on earnings. Previously, the company was trading well above the price targets that have been issued by broker-dealers who are focused on the cannabis industry. Due to the pending merger with Tilray, we believe the valuation climbed substantially higher and believe Aphria is more appropriately valued after the decline.
We will be closely following Aphria after it reported weaker-than-expected third quarter financial report. If you would like to receive updates on the opportunity, please send an email to email@example.com with the subject “Aphria and Tilray” to be added to our distribution list.
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