Initiating Coverage of Aphria: Profitable Canadian Producer With Overweight International Exposure
2:34 PM ET 6/26/20 | MORNINGSTAR
We are initiating coverage of Aphria, a cannabis company with operations in Canada and internationally. Our fair value estimates are $11 per share and CAD 15 per share, based on a 10-year explicit forecast that assumes a nearly 27% revenue CAGR and a 2029 operating margin before plant fair value adjustments of 22%. At current prices, shares look undervalued as the stock is trading over 60% below our fair value estimate.
In line with the other cannabis companies under our coverage, we assign Aphria a no-moat rating and a stable moat trend, as the probability of material value destruction over the next 10 years remains high. We also assign a very high uncertainty rating, which includes impacts from the pace at which legalization is passed, distribution is expanded, and the prevalence of cannabis consumption.
Aphria offers attractive exposure to the international market, where we forecast roughly 21% average annual growth through 2030, excluding Canada and the United States. International distribution revenue composed 67% of Aphria's net revenue in 2019, far higher than any other cannabis producer we cover. The global market looks lucrative given higher realized prices, and exporters must pass strict regulations to enter markets, which protects early entrants like Aphria.
Aphria has operations in over 10 countries outside of Canada, including Colombia, Argentina, and Jamaica. It acquired CC Pharma in 2019, a major importer and distributor of pharmaceuticals that has access to nearly 70% of Germany's pharmacies. It is also constructing a cultivation facility in Colombia, which will allow for lower production costs than in Canada for serving international medical cannabis demand.
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