Here’s Why We Believe Canadian Medical Cannabis Producer Aphria Is Worth CAD 12.60 Per Share

As the date for legalization of recreational marijuana in Canada nears, investors are closely watching every move made by the cannabis companies in the country. This is the reason why Canadian medical cannabis producer, Aphria, witnessed a sharp plunge in its stock last week after it posted a drop in its adjusted profits. While the decline in profitability is a valid concern for investors, we believe that the company has a notable upside given the growth potential in the medical cannabis market, both in Canada and internationally, as well as the soon-to-open recreational marijuana market. This coupled with Aphria’s low cost structure is likely to drive its value in the long term and enable it to capture a sizeable share in the global markets.

We currently have a price estimate of CAD 12.60 per share for Aphria using a 2019 P/E multiple of 35x. View our interactive dashboard – Aphria’s Price Estimate and modify the key drivers to create scenarios to suit your assumptions.

Preparing Well For The Legalization Of Recreational Marijuana

In order to cater to the rising demand for cannabis post the legalization of marijuana for recreational purposes, Aphria had announced its plans for a  state-of-the-art Extraction Center of Excellence in Leamington, which is the greenhouse capital of Canada. The company highlighted in its recent earnings release that it is on track with its expansion plans and is expected to harvest in excess of 20,000 kgs per month by June 2019. With this expansion, the company’s combined annual cannabis production capacity will increase from its current 35,000 kgs to 225,000 kgs in early 2019. We expect this rapid increase in the processing capacity to boost Aphria’s revenue as well as earnings in 2019.

In addition, Aphria has plans to introduce new products in the coming months to cater to the growing demand for new and innovative products. For instance, the company will launch dried flower, pre-rolls, oils etc. on 17th October, on the day of legalization of adult use of recreational cannabis. The company also is working on developing infused foods and beverages to attract the illicit market consumers to purchase legal cannabis products.

Strong Distribution Agreements

Aphria has entered into an agreement with Great North Distributors to serve as its exclusive cannabis representative in Canada post the legalization of recreational cannabis for adult-use. Great North Distributors, which is a subsidiary of Southern Glazer’s, North America’s largest wine and spirits distributor, has a strong reach across Canada, including established relationships with provincially owned and operated retailers as well as private retailers. This will provide Aphria exposure to all cannabis retailers across Canada as soon as the law is passed. Further, Southern Glazer’s plans to use its advanced data analytics capabilities to understand the retailers’ needs, as well as the consumers demands, and provide Aphria with a powerful data-driven approach to cannabis sales.

Moreover, Aphria has recently signed a Manufacturer’s Representative agreement with We Grow, a Vancouver-based licensed producer of premium cannabis, to become its exclusive sales representative across Canada. The deal has added another premium brand of cannabis to Aphria’s expanding portfolio of adult-use brands. Given its unmatched cross-Canada sales and distribution network for adult-use cannabis, the company is well-placed to leverage the premium cannabis from We Grow to tap into the recreational marijuana market.

International Expansion

Apart from tapping into the recreational marijuana market, Aphria is expanding its international presence to diversify its operations while augmenting its future growth. Recently, the company acquired industry-leading companies in Colombia, Argentina, Jamaica, and a right of first offer and refusal in Brazil through a definitive share purchase agreement with Scythian Biosciences Inc.  The deal will provide the company with access to world-class assets in strategic markets such as Colombia, Argentina, Jamaica, as well as the potential to expand its operations further in key Latin America and Caribbean markets.

Further, Aphria has cemented ties with Australian companies such as Althea and Medlab Clinical Limited (Medlab) to supply high-yield cannabis extracts for medical as well as testing use. Additionally, the company entered into a joint venture with South African company, Verve Group of Companies (VGC), to supply high-grade low-cost cannabis isolates throughout the African continent and to markets across the globe using Aphria’s international distribution network. All these partnerships are expected to strengthen the company’s presence in these markets and complement its valuation.

Do not agree with our forecast? Create your own price forecast for Aphria by changing the base inputs (blue dots) on our interactive platform.