Stocks’ detail 

Aphria Inc.

Approval from Canadian Government to Aid Business Prospect: Aphria Inc. (TO: APHA), is engaged in the production and distribution of medical and adult-use cannabis, cannabis-derived extracts, and derivative of cannabis-related products across Canada. The group operates through brands like Solei Sungrown Cannabis, RIFF and Good Supply.

Key Highlights and Business Drivers:

• The portfolio of the company consists of different consumer products which cater to the adult’s segment and contains high margin. The company offered specialized consumers products with unique attributes under brands such as Solei, RIFF, Good Supply, and Broken Coast.

The Canadian adult-use market is in a growing stage, and the Management is investing in the Canadian medical market and targeting it for developing cannabis-based products and brands

• APHA’s distribution network has access to 99.8% Canadians. The group has a network across all the provinces and the Yukon Territory in Canada. Moreover, APHA stood as one of the few licensed producers which have agreements with every province across Canada. The above agreements are likely to drive the company’s aim to become the market leader in the adult-use market.
• The company is seeking to use industrial-scale extraction technologies like CO2, butane and ethanol methods for product development. The business has a combined cultivation capacity of ~255,000 kgs per year.
• The group strategies to develop nano-emulsification technology which provides flavorless and colorless input material for edibles and beverages products. Currently, the group is investing IP partnerships, research and development and engaged in formulation development of a wide range of high margin derivative products like vapes, edibles, beverages, concentrates, topicals etc.

Financial Highlights for H1FY20: APHA came up with its half-yearly results, wherein the company posted net revenue of CAD 246.71 million, higher from CAD 34.96 million reported in the previous comparable period. Operating loss reduced to CAD 5.57 million from CAD 31.90 million in H1FY19.

Key Income Statement Highlights for H1FY20 (Source: Company Reports) 

Valuation Methodology: Price/Sales Based Relative Valuation

P/Sales Based Relative Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Stock Recommendation: The stock of APHA closed at CAD 3.12 with a market capitalization of ~CAD 833.03 million. The stock made a 52-week low and high of CAD 2.65 and CAD 14.14, respectively and is currently trading close to the lower band of its 52-week’s trading range. The Management is seeking to invest in the capital and resources and aims to hold a leading position within the adult-use market in Canada for cannabis. The above investments are primarily focused on consumer segmentation, brand development, product innovation, marketing and sales. We are of the view that the business is likely to deliver improved performance aided by the growing demand of the cannabis and its derivatives. We have valued the stock using Price to Sales based relative valuation method. For this, we have considered peers like OrganiGram Holdings Inc (TO: OGI), Hexo Corp (TO: HEXO), Supreme Cannabis Company Inc (TO: FIRE), etc., and arrived at a target price which is offering a double-digit upside return (in % terms).  Hence, we give a ‘Buy’ recommendation on the stock at the closing price of CAD 3.12, up 2.97% as on 17^th March 2020 closing.

APHA Daily Technical Chart (Source: Thomson Reuters)

Aurora Cannabis Inc.

Upcoming Investments likely to Drive Higher Market Share:  Aurora Cannabis Inc. (TO: ACB) is a cannabis company, which provides high-quality cannabis for both the global medical and the Canadian consumer use markets. The company has a product pipeline of a variety of CBD and tetrahydrocannabinol (“THC”) vape and edible products, such as gummies, chocolates, baked goods and mints.

Recent Updates: On 3^rd February 2020, the company announced the recipient of EU GMP certification for its Bradford production facility, located in Ontario. The company has a cultivation capacity of 28,000 kilograms on a yearly basis across its 17 fully planted, independently climate-controlled grow rooms.

On 6^th February 2020, the company announced the succession of Micheal Singer as Interim Chief Executive Officer. The company further informed that Terry Booth would serve the position of Senior Strategic Advisor along with the position of Director.

Key Business Highlights and Business Outlook:

• The market size of the Global Medical Cannabis Market is huge, and more than 50 countries has adopted cannabis product for medical purposes. The company has its product presence across the major countries like Canada, Germany, Denmark, Italy, Poland and Australia.

• Currently, countries like Canada and Uruguay have approved the usage of cannabis product for consumer use. Going forward, the Management believes that there will be higher legalization of cannabis product used for adult consumer markets following the higher popularity of medical cannabis globally.

• The management expects exuberant growth within the Global Hemp and Hemp-Derived Cannabidiol Market, while the business is strategizing to cater the growing demand.

Financial Highlights for Q2FY20: ACB came up with its quarterly results, wherein the company reported net revenue of CAD 56.03 million, as compared to CAD 54.18 million in Q2FY19. The company reported higher cost of sales in the quarter, which resulted in lower gross profit of CAD 22.91 million, as compared to CAD 28.38 million in the previous corresponding period. The company reported loss from operations of CAD 119.61 million, as compared to CAD 80.19 million in Q2FY19, primarily on account of higher general & administration expense and sales and marketing costs.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of ACB closed at CAD 1.01 with a market capitalization of ~CAD 1.18 billion. The stock made a 52-week low and high of CAD 0.88 and CAD 13.67 and is currently trading close to the lower band of its 52-week’s trading range. The stock has corrected ~92.38% in the last one year, reflects a bearish trend in the stock.

However, the company has identified CBD in U.S. as the most important near-term market opportunity for hemp and hemp-derived products. To cater the market, the company will be investing in the hemp-market infrastructure across the U.S. through both organically and via acquisition, as per market scenario. Considering the above rationale, and prevailing trend in its share price, we give a ‘Watch’ recommendation on the stock at the closing price of CAD 1.01, up 2.02% as on 17^th March 2020, while we look for growth catalysts in near term.

ACB Daily Technical Chart (Source: Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.