The projections of the global cannabis market reaching $200 billion in annual sales caused the Canadian LPs to chase the global market in a wild fashion. A company like Aphria (APHA) tried to build a business covering the whole global cannabis market at one time without even being successful at home in Canada. Without vast financial resources, the company will best serve shareholders by reigning in global expansion plans and building a profitable home base for future expansion.
So far, media reports suggest Aphria is looking to unload shares in Althea Group Holdings, Ltd located in Australia. The company reportedly owns a 25% stake in the Australian company amounting to 50,750,000 shares.
Some news reports suggest Althea Group has obtained an additional supplier, but either way Aphria needs to reign in expansion and focus on key markets. At the current price of around 50 cents per share, the company might obtain $25 million from selling the shares.
The recent FQ1 MD&A highlights a company with 8 majority and wholly-owned subsidiaries in Canada alone. Once looking past Canada, the company has vast businesses in Argentina, Bermuda, Germany, Colombia, Denmark, Jamaica, Israel, Italy, Lesotho, Malta, Portugal, South Africa and the United Kingdom. The notable exception here are investments in Asia with a large focus on Canada, Europe and Latin America. The investment in Althea Group is a minority position and the company already has diverse operations around the world making the exit of a position in Australia as a good place to start in focusing on existing strong operations.
The problem with Aphria is the company only has C$31 million in higher margin cannabis revenue. The majority of the current revenue comes from low margin, distribution revenues in Europe. Neither business has a strong market leadership position or strong profits.
In the last quarter, Aphria had a small EBITDA gain of only C$1 million, but the company does forecast adjusted EBITDA totals of C$90 million in the current fiscal year. With a cash balance of C$464 million at the end of August, the cannabis company is in a solid financial position for the sector.
With the Canadian cannabis stocks and market beaten down, Aphria likely sees opportunity for further investments at home to improve the profitability of their primary business. The company doesn’t need to chase investments and medical cannabis sales half way around the globe when the majority of sales are taking place in North America.
Aphria spent C$30 million in quarterly operating expenses while still producing quarterly losses. The company needs to figure out how to turn this operating base into a profit machine before investing in a small market like Australia where medical cannabis sales remain relatively small.
Wall Street is pretty upbeat about Aphria. TipRanks analysis of 8 analyst ratings shows a consensus Moderate Buy rating, with 6 analysts saying “buy,” while only one recommending “hold,” and one suggesting “sell.” The average price target among these analysts stands at $8.45, which implies about 70% increase from current levels. (See Aphria stock analysis on TipRanks)
The key investor takeaway is that Aphria becomes a far more interesting stock, if the company further shores up the balance sheet and reigns in wild global investments.
The stock has a listed market cap in the $1.3 billion range and trades at about 20x EBITDA estimates for the year. Assuming the company hits EBITDA targets and moves away from growth at all costs, the stock is appealing at $5.
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