Following an intense short report alleging Aphria (APHA), a Canadian cannabis company, is scamming its investors, analysts are having second guesses about the stock. That rings true for Eight Capital’s Graeme Kreindler who says despite believing the short report was “malicious,” he recognizes Aphria management will need to put in a great effort in order to get the company’s reputation back. As a result, Kreindler lowers his rating for the company from Buy to Neutral and drops the price target from C$22 to C$7, showing about 20% potential upside. (To watch Kreindler’s track record, click here)
The research published alleges Aphria reported inflated costs of marijuana farms and office spaces in Jamaica, Colombia and Argentina. Photographs revealed office spaces uninhabited and green spaces that weren’t growing much green.
“We remain uncertain with respect to the potential for future legal and regulatory repercussions as well as the potential for impacts to APHA’s key stakeholder relationships both domestically and internationally,” Kreindler says.
“Despite short seller allegations and pressure on the stock, we recognize the value contained within the Company’s base of domestic assets. Our valuation is largely derived from Canadian medical and adult-use sales, the latter of which we expect to experience significant growth in the near-tomedium term. The international upside included in our initial and current projections is largely immaterial to account for the relatively higher political, regulatory and execution risks involved in international markets,” the analyst continues.
Looking at the numbers, APHA is expected to receive full licensing in the first quarter of 2019, at which the analyst believes APHA will achieve annualized production of 255,000 kg/year within H1/19. Domestically, the company is expected to largely support supply agreements, which currently includes a disclosed 23,000 kg across various provinces in Canada and a 5-year 175,000 kg supply agreement with EMC. While these opportunities seem tangible, the analyst says he feels that the potential for a deal with APHA has significantly decreased near term due to the allegations, with partners looking elsewhere for now.
TipRanks has been reviewing the analysts who’ve been checking up on the cannabis industry and since the report release, there has been little movement from other analysts. Out of 11 writing about Aphria, 9 are bullish, 1 is sidelined and 1 is bearish. The consensus price target of $14.50, shows a potential upside of nearly 150%. (See APHA’s price targets and analyst ratings on TipRanks)