With contributions from Saif Shah
Medical marijuana licensed producer Aphria (APH.TO) reported in-line revenue and EBITDA. Below are APH’s fiscal Q1/18 results versus our expectations.
Source: Company reports and Perspectec
An unrealized gain with upside – Results were very much in-line with our expectations up until “unrealized gain on long-term investments”.
Aphria has used the $200 million+ investor funds raised not only for it’s Leamington greenhouse expansion but also for a number of <20% ownership positions in public (Level 1) and private (Level 3) marijuana companies.
APH’s long-term investments would have decreased in value the last three months if it wasn’t for their Arizona greenhouse investment (Copperstate). Copperstate’s first commercial sale of weed caused Aphria to increase the ascribed value of the greenhouse by over $22 million or $0.15 per diluted share. While investors perhaps didn’t care (share price flat after reporting results), the 1.7 million square foot Arizona greenhouse is materially larger than Aphria’s one million square foot Leamington greenhouse and is by far its investment with the most upside.
Source: Company reports
Other Points:
Cash cost to produce per gram decreased from $1.11 to $0.95 Q/Q, a 14% decrease. The decrease was said to be due to increased harvests associated with added growing space during the quarter (Part II expansion). In August the company recorded its first sale of product grown, flowered and harvested exclusively from its Part II expansion. This likely means lower costs will continue over the next few quarters.
Veterans Affairs Canada (VAC) policy change. The reduction in coverage from 10 grams per day to 3 grams with an $8.50 per gram price cap caused Aphria to record sales of approximately $1.7 million to veterans in the quarter. This was a decrease of approximately $1 million from the previous quarter. If and when adult recreational use of cannabis is implemented by the Government, veteran patients should become a smaller relative percentage of APH’s overall sales.
Expansion plans are on schedule. First sale from harvest for Part III is in May 2018 and for Part IV, mid-to-late January 2019. This means Part III will be operational in time for the July 2018 legalization date.
Increased storage space to hold 12,500 kilograms of processed products. APH received approval for its recently completed four Level 9 vaults each with a maximum allowable storage capacity of 3,125 kilograms. More space will help with excess capacity, which will prove important given the higher production levels.
The company sees its trailing 12-month Return on Invested Capital jump from 2% to 7%
Nuuvera will move from a Level 3 investment to Level 1 post its RTO of Mira IX Acquisition. This will bring greater visibility to Aphria’s second largest private investment
Progress in Federal and State marijuana laws at the least can increase Aphria’s NAV materially. The biggest takeaway from this is that further Florida and Arizona recreational marijuana progress could increase Aphria’s net asset value materially. It is possible Aphria made their investments at a relatively low valuation. U.S. Federal marijuana legislation easing could cause Aphria’s 19% ownership in Copperstate to increase and turn this investment into EPS contributing equity income or potentially even revenue.
U.S. Congress has passed appropriations bills each of the last three years that have not allocated funds for prosecution of marijuana offenses of individuals who are in compliance with state medical marijuana laws.
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