Updated on February 7th.
Written by Robin Manson-Hing with Contributions from Saif Shah.
We have received exclusive photos on Aphria’s phase 3 and 4, 700,000 square foot expansion from Saif Shah. These pictures along with those coming out on Aphria’s phase 3 expansion have caused us to raise questions on a topic that does not appear to be widely discussed.
Recall based on Aphria’s September press release it was said that phase 3 would be completed by September 2017 (12 months following a September 2016 press release) and that Health Canada approval would take place by January 2018 (four months following the expansion’s completion). As we are now in February, the question on when Aphria will receive Health Canada approval is becoming a bigger question. We now believe even if an approval were to take place over the next few days, actual first sales from the expansion would not take place until the end of May.
With each passing day that Aphria is not press releasing that it has received Health Canada approval for its phase 3 expansion, the increasing risk it faces in Q4/18 and Q1/19 production forecasts in yellow.
Exhibit 1: The original timeline for the Part 3 expansion versus our Updated Forecast
Source: Perspectec and Company Reports
While Aphria continues to be the most investable marijuana stock in Canada, we would like to see Health Canada approval be given for Phase 3 and the share price to come down before recommending the stock.
Pictures
We have also received photos over the last few months on Aphria’s phase 4 expansion and have decided to post them
Land for Phase 4 was leveled in early September of 2017, just two months after July for Phase 3.
Source: Saif Shah
Posts were also installed in September of 2017 for Phase 4, again two months behind Phase 3. The frame will support lighting, humidity controls and ventilation similar to most of the rest of its facility. Advanced ventilation is used in the summer versus air conditioning used for indoor facilities or regular fans used by most other greenhouses such as 7Acres.
Flood and heated flooring with re-enforced steel were installed in October for phase 3 – Similar method to the rest of Aphria’s existing greenhouse. Helps with winter growing.
Unknown metal dual piping pre-insulation – being hung for unknown purposes (perhaps humidity)
Cement poured, dried and set in October. Flood and Heating Flooring included.
Large sewage pipes – No capacity issues here
CapEx at work!
Where we stand today?
As of January 18th, Phase 3 appears to be waiting for Health Canada Approval. Touch-ups using Skyjacks are mostly completed. Most final construction was likely completed that month.
Even with aggressive Health Canada timing, Aphria will be under pressure to meet its expected May timeline for selling its harvest from its phase 3 expansion.
What is increasingly likely to happen is what took place with phase 2. Aphria was pushed to go-to-market to meet its medical patient demand with less than ideal plants. This resulted in production meeting expectations but also saw lower yields. The lower yields translated to a higher “all-in” cost of sales for fiscal Q2/18. Given fiscal Q4/18 ends on May 31st, this could impact fiscal Q4/18 and especially Q1/19 production and/or all-in cost of sales versus expectations.
We do not recommend buying APH prior to Aphria press releasing that it has received Health Canada approval for phase 3. Aphria has told us that they will press release when they receive approval.
