Aphria (TSX: APHA) is a Canada based company, which manufactures and sells medicinal and recreational cannabis. The company operates through retail and wholesale channels in Canada and internationally. Aphria is the main distributor of medical cannabis to Germany and has operations across more than 10 countries outside of Canada.

Q4FY20 Financial Highlights: APHA declared its quarterly results, wherein the company posted Cannabis revenue of CAD 65.461 million as compared to CAD 34.306 million in the previous corresponding period (pcp). Net revenue stood higher at CAD 152.203 million as compared to CAD 128.568 million in pcp. The increase was majorly driven by higher income from adult-use cannabis products, while a lower performance from medical cannabis products stood as a drag. Gross profit stood at CAD 47.390 million against CAD 36.007 million in pcp, thanks to improved revenue and stable cost of goods purchased, while higher production costs remained a drag. The company reported higher operational expenses of CAD 116.592 million as compared to CAD 60 million in Q4FY19 due to an increase in General and administrative costs, Share-based compensation expense, significantly higher selling expenses, higher marketing and promotion expense and inclusion of impairment costs. The company reported a net loss of CAD 98.843 million as compared to a net profit of CAD 15.760 million in pcp.

Q4FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company’s ability to cultivate, process, and sell medical and adult-use cannabis, cannabis-derived extracts and derivative cannabis products in Canada is dependent on maintaining the Licences with Health Canada. Failure to comply with the requirements of the Licences would impact the business adversely.

Stock Recommendation: The stock of APHA soared ~11% and ~28% in the last one month and three months, respectively. The company’s second-quarter result was below market expectation. The quarter was marked by lower demand for its medical cannabis products, which remained a reason for concern. Meanwhile, a strong performance from the ‘adult-use market’ contributed to the top-line growth. The company was battling with higher operating costs and made an operating loss of CAD 69.202 million, which includes an impairment cost. Further revenue from the wholesale cannabis products dipped sharply to CAD 327 million, significantly lower from CAD 4,171 million in pcp. We believe, the products are comparatively new to the consumers, and the company is making its mark to develop its brand and entering new product categories. We believe, the marketing costs associated with it is huge, and lack of profitability takes us on the sidelines. Furthermore, entry of a new player within the segment might lead to price competition. The APHA stock is trading at a premium valuation on NTM basis, as compared to its industry median. On an EV to EBITDA basis, the stock is available at 33.0x on NTM basis, against industry (Pharmaceuticals) median 5.5x. The stock is available at a P/CF multiple of 36.2x on NTM basis as compared to industry (Pharmaceuticals) average of 7.7x. Considering the above facts, we believe that the stock is due for a correction. Hence, we recommend a ‘Sell’ rating on the stock at the closing price of CAD 6.52 on July 29, 2020.

APHA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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