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Topic: Cannabis Investing

Big cannabis producer banks on low-cost production and aggressive growth strategy

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Marijuana Producer

This Ontario-based producer has a variety of recreational and medical cannabis brands and continues to broaden its operations. 

The company is expanding internally and growing by acquisition as well. One $425 million deal opens up markets in Europe and Africa. Its commitment to low-cost production has helped make the firm profitable, while its global supply agreements and portfolio of brands are a plus. However, like many cannabis firms, it must generate big revenue growth to live up to its high market cap.


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APHRIA INC., $16.39, symbol APHA on Toronto (Shares outstanding: 249.5 million; Market cap: $4.1 billion; TSI Cannabis Quality Rating (CQR):  ; www.aphria.com), is a cannabis company based in Leamington, Ontario.

Aphria continues to pursue a strategy of low-cost production of top-grade cannabis using the latest technologies for greenhouse production.

The company has a portfolio of medical and recreational brands, including Solei Sungrown Cannabis, RIFF, Good Supply, and Goodfields. It also has a presence in more than 10 countries across five continents.

Aphria continues to expand its production facilities (all in Leamington, Ontario) and will soon be capable of producing more than 225,000 kilograms of cannabis annually. It has invested in automation in order to maintain a low-cost advantage and to avoid the labour shortage that is beginning to affect the industry.

In March 2018, the company announced it was building a $55 million cannabis-oil extraction facility in Leamington. To help pay for the facility, it raised $225 million in a June 6, 2018 share offering.

Aphria’s acquisitions include paying $217 million in February 2018 for Broken Coast Cannabis Ltd. That production facility is located in Vancouver and grows the premium brand BC Bud.

In March 2018, it also paid $425 million for Nuuvera Inc., a global cannabis producer and seller with operations in Germany, Italy, Spain, Malta, and Lesotho.

In August 2018, Aphria announced a joint venture with Perennial, a retail brand management company, to develop new cannabis-infused products and brands for the Canadian market.

Overall revenues have grown from $551,430 million in 2015 (fiscal years end May 31), to $8.4 million in 2016, and $20.4 million in 2017. In fiscal 2018, revenue increased 80.9%, to $36.9 million.

Aphria has been profitable since 2016. After posting a loss of $6.5 million ($0.14 per share) in 2015, the company earned $397,961 ($0.01 per share) in 2016 and $4.2 million ($0.04 per share) in 2017. In fiscal 2018, earnings jumped to $26.6 million ($0.18 per share). However, the gains were all from financing transactions or inventory adjustments. It lost money on an operating basis.

In the three months ended August 31, 2018, Aphria’s revenue rose 118.0%, to $13.3 million from $6.1 million a year earlier. The company earned $21.2 million in the latest quarter, up 54.3% from $13.7 million. Per-share earnings fell 18.2%, to $0.09 from $0.11, on more shares outstanding. However, on an operating basis, it continued to lose money.

The company holds cash of $314.0 million, or $1.26 a share. Its long-term debt is just $52.0 million.

Aphria’s growth by acquisition adds risk. However, it has low-cost production facilities, national and global supply agreements, and a portfolio of brands. They should benefit from its collaboration with Perennial.

Like most marijuana producers, the company needs huge revenue growth to justify its current market cap. If its revenue growth stalls, or if its international ventures run into significant problems, Aphria shares could drop sharply as momentum traders unload the stock.

Aphria Inc. has a 3½-Leaf Cannabis Quality Rating (CQR). The stock is a speculative buy for aggressive investors who want exposure to the marijuana industry.

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