While the cannabis sector faces capital concerns, Aphria (APHA) was just able to secure a reasonably priced financing. The move possibly changes the equation to favor the Canadian cannabis players with large facilities already built while paving the way for the company to fully implement their target of 255,000 kg of annual production capacity. Aphria is now positioned to thrive during market consolidation, but investors are now fully focused on profitable capacity growth and all of this additional production hitting the market is problematic in the short term.
Solid Financing
As a lot of industry players face cash crunches with mounting losses, Aphria has both a solid balance sheet with cash and facilities while having major plans for EBITDA profits. In addition, Aphria has added an C$80 million secured financing for the Aphria Diamond facility.
The company claims a major Canadian chartered bank was the sole book runner for a group of lenders willing to take on the senior secured credit facility of C$80 million. The company predicts an interest rate in the 5% range while competitors take on financings with double digit annual costs.
Aphria is already the self-proclaimed company with the largest cash balance in the cannabis industry without the dilution of a strategic partner. The company ended the August quarter with C$460 million on the balance sheet and another C$542 million worth of capital assets.
The company doesn’t appear to need the cash, but a strong balance sheet will help Aphria survive and thrive any downturn in the industry.
Doubling Capacity Is Problematic
The Diamond One facility is 51% owned by Aphria and includes an annual growing capacity of 140,000 kg. The company last reported production capacity of 115,000 kg bringing the total annualized production capacity to 255,000 kg.
The company plans to have 70% of the facility planted by mid-week with a goal of selling dried flower production to the provincial control boards in March 2020. Analysts project a significant boost in quarterly revenues to C$175 million in the May quarter, up from just C$126 million in the last quarter.
The key here is that the cannabis company only sold 6,000 kg of cannabis in the quarter ended August 31. The new quarterly sells goal has to increase 10-fold to over 60,000 kg to fully cover the new capacity coming online.
These production goals will help the company reach revenue targets of up to C$700 million for FY20. The revenue shift into recreational cannabis with margins over 50% from distribution revenues with low margins is needed in order to achieve the big EBITDA target of up to C$95 million for this fiscal year. Investors are likely to remain skeptical that all Aphria is accomplishing is flooding the market with more supply.
Consensus Verdict
APHA’s Strong Buy consensus rating is based on an impressive 6 “buys” ratings, indicating confidence in the stock. In the past 3 months, only one has analyst rated the stock a “sell,” and even he sees an upside for the stock. The average price target of $8.48 implies over 80% upside potential from the current share price of $4.68. (See Aphria’s stock analysis on TipRanks)
Takeaway
The key investor takeaway is that Aphria remains the best bargain in the large Canadian cannabis sector. Below $5 now, the stock only has a market value of $1.2 billion while so many questions will rage regarding the company moving forward with the full capacity from the new Aphria Diamond facility.
My view remains very hesitant on the company reaching internal FY20 EBITDA targets knowing other Canadian cannabis players are desperate for sales. Regardless, the stock is best and cheapest play in the Canadian cannabis space with the stock already discounting an expect miss of the internal EBITDA targets.
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