Shares of Aphria Inc. (TSX:APH) jumped 15% after announcing a joint venture with greenhouse grower Double Diamond Farms
SmallCapPower | January 10, 2018: Aphria Inc. (TSX:APH) announced Monday that it has entered into a partnership with Leamington-based greenhouse grower Double Diamond Farms for the creation of a new joint venture ‘GrowCo’ that would deliver incremental annual production capacity 120,000 kilograms of cannabis to Aphria. The deal is a significant milestone that could make Aphria, along with its existing 100,000 kgs of expected cannabis production, the largest greenhouse cannabis operation in the industry with combined annual capacity of 220,000 kilograms by January 2019. Post the major announcement, shares of Aphria zoomed nearly 15% on Monday and rose 4% on Tuesday.
As per the terms of the deal, Aphria will hold a controlling 51% interest in GrowCo and supply its Standard Operating Procedures, quality oversight and apply for a second Health Canada cultivation license for the site. Double Diamond will be a 49% partner and will supply the land, Dutch style greenhouses, existing infrastructure and employees for the venture. GrowCo will require total funding of $80-$100 million.
The deal will not only accelerate Aphria’s production in the quickest time possible but will also save on capex. Purchasing a facility that uses Double Diamond’s greenhouses will accelerate Aphria’s capacity increase by over a year versus building out its existing 100-acre site. Costs of construction on Aphria’s own land would have been much higher (~$150 million) than the expected cost of $50 million for the JV.
Aphria Chief Executive Officer Vic Neufeld said, “Since the Aphria journey began in early 2014, a key pillar to the Aphria success story has been our unwavering commitment to “powered by the sun,” and nowhere is that more effective than in Leamington, Ontario, where average daily sunlight hours, intensity of optimum lighting and moderate climate provides for ideal greenhouse growing. Building on our Leamington advantages, I am very excited to announce that Aphria has entered into another acquisition of Dutch greenhouse campus in the Leamington area. Partnering with Double Diamond, a major local greenhouse grower, Aphria will have access to almost 32.0 acres (just less than 1,400,000 square feet of greenhouse) plus 72,000 of infrastructure to service not only the almost 32 acres, but a future build of another 32 acres. Double Diamond is an industry-recognized leader in growing various produce using the greenhouse technology advancements, and brings solid talent and a labour pool necessary to support the annual incremental capacity of over 120,000 kgs.”
With the deal, Aphria could be compared with the leaders in the Canadian cannabis sector, and is well positioned to supply the growing medical cannabis market as well as the large recreational opportunity in mid-2018. In particular, Aphria could become the leader in the wholesale cannabis sector, supported by the recent supply agreement with Shoppers Drug Mart, Canada’s largest pharmacy chain with more than 1,300 retail stores nationwide.
On Wednesday, Aphria announced its second-quarter 2017 financial results, recording its ninth consecutive quarter of positive adjusted EBITDA from operations.
Based in Ontario, Canada, Aphria is focused on producing and selling medical marijuana through retail sales (online and telephone) and wholesale channels (ACMPR Licenced Producers). At the current market cap of $3.5 billion (156x its TTM sales), Aphria is the third most valued cannabis company in Canada, behind Canopy Growth Corp ($8.0 billion) and Aurora Cannabis Inc. ($6.2 billion).
Disclosure: Neither the author nor his/her family own shares in any of the companies mentioned above.
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