Here’s Why Medical Marijuana Producer Aphria Could Become A Leader In The Recreational Marijuana Market

Canada will soon become one of the few countries to legalize adult-use of marijuana for recreational purposes. Consequently, Canadian cannabis stocks have witnessed a surge in their valuation lately. While the investors are optimistic about the upside in these pot stocks, and are anticipating these stocks to follow the strong growth delivered over time by tobacco stocks, such as Philip Morris  and Altria, the upcoming recreational marijuana market is likely to come with its own problems. That said, we believe that Aphria Inc. (TSX:APH), a Canadian medical marijuana producer, is likely to emerge as a winner in this new market.  Here’s why:

Low Cost Of Production

Aphria is an Ontario-based medical cannabis company, producing dry cannabis and cannabis oil of varying qualities and strength that are sold through its wholly-owned licensed subsidiary – Pure Natures Wellness (PNW) – since 26th November 2014. The company’s revenue is notably lower compared to its competitors, such as Canopy Growth and Aurora Cannabis. However, it generates strong profits even when its peers are struggling to break-even. In fact, the company has delivered ten consecutive quarters of positive EBITDA (earnings before interest, taxes, depreciation, and amortization).  View our interactive dashboard analysis.

This is largely due to Aphria’s low cost of production. The company has a production facility in Leamington, which is the greenhouse capital of Canada. As a result, it produces cannabis in the most natural growing conditions, which allows it to deliver high quality products. It also enables the company to manufacture these products at significantly low costs, making it one of the lowest cost producers of medical marijuana in the country. The chart below shows how Aphria’s cost of production as well as selling is much lower compared to its counterparts.

As Aphria continues to scale-up, it is likely to experience economies of scale, further reducing its cost of production. This will give the company a competitive advantage over its peers.

Capacity Expansion To Tap Recreational Marijuana Market

Since Aphria is one of the lowest cost producers of marijuana in Canada, it is set to benefit from the legalization of adult-use of cannabis. In order to exploit this opportunity, the company announced its plan to spend $55 million to build an extraction facility in Leamington. This 1 million square foot, state-of-the-art extraction center is expected to be one of the largest cannabis greenhouses in the world. It will be equipped to produce world-class cannabis concentrates, including fractionated distillates and will be able to process around 200,000 kgs of cannabis every year. The facility is scheduled to release its first concentrates by March 2019.

In addition to this new facility, the company also has plans to spend an additional $20 million at its Aphria Diamond facility to increase capacity by 20,000 kgs annually and $10 million to add 10,000 kgs of capacity to its Aphria One operations. 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. With the rapid increase in its processing capacity, Aphria’s revenue, as well as earnings, are likely to surge in 2019 and beyond.

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