PI Financial Raises Aphria’s Price Target To $11.00

On Wednesday, Aphria Inc (TSX: APHA) (NASDAQ: APHA) announced that it had entered an agreement to purchase 100% of SweetWater Brewing Company for a total of U$300 million with a U$66 million cash earn-out that will run through 2023. The transaction, as per Aphria, is being treated as a “merger and acquisition.”

Of the U$300 million, U$250 million is to be paid in the form of cash, while U$50 million will be paid in stock. Management broke down the cash portion and said they would be financing U$100 million with new debt, while another U$100 million is coming from their at-the-market facility, and the remaining U$50 will come from cash reserves. Aphria noted that they paid roughly 12.5x trailing EBITDA, and the deal is expected to be immediately accretive to EBITDA and margins upon the close.

Friday morning, PI Financial upgraded its 12-month price target on Aphria to C$11.00 from C$10.00 and reiterated its buy rating. Notably, this price target change is very similar to that of Canaccord Genuity’s reaction to the news.

Jason Zandberg, PI’s cannabis analyst, believes that this acquisition is very positive for the company as it “provides Aphria a side-door entry point to the US cannabis industry when cannabis is federally legal.” He adds that they believe that the business still has a lot of room to grow via its entry into the Canadian beer and seltzer markets, making the transaction a positive one overall.

Zandberg comments, “we are assuming a late December 2020 close and expect calendar 2021 revenue of $70M-$80M and EBITDA of $15M-$20M.” The expectation Zandberg adds, is that there will be an annual growth rate of an estimated 5% for both 2020 and 2021, with margins reducing in terms of EBITDA as a result of costs associated with further product launches as well as expansion.

Addressing the change in the price target, PI comments that the increase is mainly due to the increase in revenue and EBITDA estimates for 2021 and 2022. Zandberg now estimates revenue and EBITDA to be $704 million and $80 million in 2021, growing to $863 million and $128 million, respectively.

Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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