Photo by Media Raw Stock/iStock via Getty Images Heading into the Tilray (TLRY) merger close, Aphria (APHA) reported a horrible quarter. The company further confirmed why overpaying for Canadian cannabis stocks is never warranted. My investment thesis remains negative on Aphria and the new entity despite a nearly 50% dip from the peak in February.
Ugly Quarter
Aphria has long been a favorite in the Canadian cannabis space despite the company regularly failing to hit financial targets. Due to the majority of the sector failing to even generate adjusted EBITDA profits, Aphria was celebrated as a strong player in the group.
The company famously promoted FY20 adjusted EBITDA target of C$92 million, but Aphria only ended up reaching C$17 million in EBITDA profits for the year. Based on this history, market shouldn't be as surprised to see the company miss FQ3 targets by a very wide margin.
Aphria reported a shockingly horrible quarter as follows:
- Net revenue of C$153.6M, +6.4% and a decrease of 4.3% Q/Q, missed analyst expectations of C$163.3M.
- Net cannabis revenue of C$51.7M, 7.8% lower from FQ3'20, and down 23.8% from prior quarter.
- Adjusted cannabis gross margin of 39.2% vs. 45.9% in prior quarter.
- Kilograms sold: 18,695, a decrease of 30.1% compared to sales of 26,730 in the prior quarter.
The company did report positive EBITDA in the quarter of C$12.7 million, up slightly from C$12.6 million in the prior quarter. The explanation of lower cannabis sales due to lockdowns in Canada and Germany doesn't appear to hold much water.
According to Hyfire data calculated by ATB Capital Markets, the new Tilray lost market share during Q1. The combined company saw market share in the recreational cannabis market dip from 22% to only 19%. While Aphria had a bad quarter, Tilray is predicted to have seen market share nearly fall in half to only 4.2% in Q1.
Either way, the quarterly numbers continue to confirm the lack of actual cannabis revenues on the books for Aphria. For the quarter ending in February, net cannabis revenues were only C$51.7 million, or 34% of the total business. Even counting the beverage alcohol revenue of C$14.8 million, Aphria had just $66.5 million of net revenues outside of the low-margin distribution business.
Source: Aphria FQ3'21 earnings release
Not Worth The Risk
The real business of Aphria is only running at a C$266 million annual rate or hardly equivalent to ~$210 million. The company isn't even a small multi-state operator in the U.S., yet the stock still has a $4.4 billion market cap based on the Tilray deal offer of 0.8381 shares per Aphria share.
Tilray just delayed their vote until April 30 to allow shareholders longer to vote. The deal is likely to pass and the up to C$100 million in synergies will help with the valuation, but the new Tilray is just far too expensive for the actual cannabis business.
My recent research on the new entity highlighted how the combined company was only forecast to generate up to C$938 million in FY22 net cannabis revenues. A lot of the sales for the business come from the Germany distribution business with an adjusted EBITDA margin of 1.5% in the last quarter and a struggling hemp business owned by Tilray.
After the horrible quarterly results, analysts have correctly cut the revenues targets, especially for Aphria. The combined company is only predicted to reach $1.15 billion (C$1.44B) in FY22 revenues now, down ~$50 million from previous estimates.
Data by YCharts Investors should really question whether Aphria can grow revenues by 50% next FY. Their business makes up nearly 65% of the new Tilray, so the recent results should question whether the company will come anywhere close to matching these targets.
The current FY revenue targets are $790 million (C$988M). Remember, these numbers include ~$350 million (C$438M) in non-cannabis revenues.
Takeaway
The key investor takeaway is that Aphria isn't a bargain here due to a history of struggling to hit financial targets. The U.S. House voting on The SAFE Banking Act, H.R. 1996, next week will likely provide a pop to the stock. Any longs stuck in the stock should use gains early in the week as a time to exit Aphria.