Aphria Inc. Q2 Financial Results: Better Than Many Others?

Aphria Inc. (TSX:APHA), one of the Canadian marijuana stocks, reported second-quarter 2020 financial results on Tuesday

SmallCapPower | January 16, 2020: Aphria Inc. (TSX:APHA) (NYSE:APHA), one of the Canadian cannabis stocks, reported Q2/20 financial results on Tuesday, January 14, 2019, before markets opened. Results were highlighted by net cannabis revenue of $33.7M and net revenue of $120.6M, which missed the consensus estimate of $128.6M in net revenue. Management also downgraded F2020E revenue guidance to $575M to $625M (from $650M to $700M) and adj. EBITDA to $35M to $42M (from $88M to $95M).

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Cannabis revenue increased 9.5% sequentially. Q2/20 net revenue was $120.6M, a decrease of 4.4% QoQ. The decrease was due primarily to a 9.3% reduction in distribution revenue to $86.4M (was $95.3M), which was attributed to seasonality. Cannabis revenue increased 9.5% to $33.7M; the increase was driven by a 45.5% increase in recreational revenue to $29.0M (was $19.9M during Q1), while medical revenue fell 1.4% to $10.1M. Cannabis kilogram and kilogram equivalents sold during the quarter were up 18.3% to 7,062 kg.

Cannabis gross margins expand by 900 bps. Cannabis gross margins came in at 59%, an increase from 50% in Q1/20. Gross margin expansion can be attributed primarily to two main reasons: lower wholesale sales and wholesale price compression, and reduced production costs. Cash costs per gram fell 22.4% to $1.11/gram and all-in costs decreased by 21.4% to $1.43/gram, which were driven by a full-production ramp up at Aphria ONE.

Downgraded revenue guidance to $575M to $625M (from $650M to $700M) and adj. EBITDA to $35M to $42M (from $88M to $95M). Distribution revenue is still expected to represent slightly more than half the total net revenue, meaning that Canadian cannabis net revenue is expected to be ~$265M. This implies that Aphria will need to generate ~$200M of cannabis revenue for the remaining two quarters of F2020 (ending May 31, 2020). Revenue growth is expected to come from Cannabis 2.0 products.

Aphria is unlikely to meet its revenue guidance. Aphria would have to increase cannabis revenue by 78% next quarter and then by 135% in Q4 to meet the lower end of this guidance. We believe that high double-digit and triple-digit revenue growth is almost impossible. We see two main risks, which we believe will hamper Aphria in achieving its guidance. First, the limited roll-out of vape products, both AB and QC have imposed temporary bans on the sale of vape pens. We believe this could put downward pressure on APHA’s revenue as vape pen SKUs represent most of the Company’s 2.0 products. Second, the continued low store count in Ontario is cause for some concern. The 40 additional stores that were expected to open last October are now being delayed until March 2020, at the earliest, with additional stores being pushed out until July 2020. As Aphria’s fiscal year end is May 31, 2020, the Company basically has four months to quadruple its sales, which we view as unlikely to happen, given lower-than-expected Canadian vape sales and store rollout in Ontario.

Key Takeaways. Aphria’s Q2/20 financial results missed analyst estimates however the results were still better than many Canadian peers that posted sequential declines in sales. Aphria’s operating income (gross profit before FV minus OPEX) is still sitting at a loss of $18.6M. Additionally, based on current sales, Aphria has ~1.2 years of inventory on hand, most of which is earmarked to be extracted for use in Cannabis 2.0. But with further production capacity expected to come online this could be an indication that cultivators could face further margin compression. In our view, Aphria is still positioning itself to become one of the strongest LPs, even though its revenue guidance may be overly optimistic. Aphria is one of a few cannabis companies to have achieved positive adj. EBITDA and is cashed up with $498M in cash on its balance sheet, at a time when capital is becoming harder to raise for cultivators, with some potentially facing insolvency.

Valued fairly when compared with peers. The median consensus estimate for Aphria’s next twelve months (NTM) of revenue is ~$614.8M. However, for a more accurate comparison we backout ~$380M of CC Pharma revenue to get net cannabis revenue. With CC Pharma revenue backout, Aphria is expected to do ~$234.8M in the next 12 months, implying an NTM EV/Sales multiple of 7.1x, which is slightly higher than the average multiple of the peer group.

Shares of Aphria closed Wednesday’s trading session up 6% to C$6.88. Aphria stock trades at a market cap of C$1.6B.

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