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Subject:  Aphria (APHA) - A cannabis company Date:  12/7/2018  2:44 PM
Author:  BenGrahamMan Number:  3239 of 3782

My notes are better read at this link, yet, I put in all but the tables and pictures below. https://rbcpa.com/aphria-rbs-investment-notes/

These are my Aphria investment notes. As all my posts, this post is nothing other than a sharing of research. Please read my disclaimer in the link below. I very well may never discuss this position again, even if we exit, or buy more. This post is not a solicitation, suggestion to buy or sell, nor an implication of such. Do your own DD!

These notes are in chronological order.


December 7, 2018 ($6.13) Quick Valuation look



The price has escalated in several days. The current valuation is $1.57B. This is 2.67X projected F2021 revenues. F2021 revenues could be incredibly aggressive.

Here is a table of potential valuations and Price to Sales metrics, using F2021 Projected revenues of $590M USD:

What if price? Shares O/S Valuation Price / Projected F2021 Revenues

$4.00 254M $1,016M 1.72X
$6.00 254M $1,524M 2.58X
$8.00 254M $2,032M 3.44X
$10.00 254M $2,540M 4.31X

To put this into perspective, Cronos (CRON $12.88) announced Altria would be a 45% investor. Cronos current market cap is ~$3.25B, and their F2021 revenues are not projected to be as high as Aphria. Hence one can see that on a relative basis, perhaps Aphria is underpriced, even at $10.00. Yet, relative valuation for a potentially over-valued sector is not necessarily relative to true valuation.

December 6, 2018 ($4.00) Increased our position to ~0.75% of a portfolio. Our average cost is now $4.36

There have been several rebuttals to the short selling report from Quintessential Capital Management and Hindenburg Research. The report could be accurate, yet as stated below, we think the risk reward of ownership at $4.36 is compelling. Aphria does have ~$300M CDN in cash and short-term securities.

December 5, 2018 ($4.55) Bought ~0.50% for certain accounts at $4.66 (12/4/18), and if cash was available
Market cap using 254M shares and $4.66 USD would be ~$1.2B. F2021 revenues could be $590M USD. Hence a Price to future revenues of 2X. This is not egregious if growth continues, and if fraud is not within the company.

The company has been defending itself since the short report from Quintessential Capital Management and Hindenburg Research, which was released on Monday. The short report claims that Aphria’s management has been deceiving its shareholders to line their own pockets. The report is well written, and there is a video linked below, that is also quite interesting and thorough. Aphria, in a statement issued Monday, called the allegations “malicious.”

Here is a link to the reports and videos of the allegations. http://www.qcmfunds.com/aa/

A cannabis analyst who I respect a great deal, doesn’t think they are criminals or liars. There are disturbing facts, like “Building 51”, “The lady who said she is not a director,” and “the missing scientist.” He doesn’t think Aphria are criminals and liars, but their due diligence failed. He thinks the wipe out of the potentially bad investments have been priced into the company. Of course, the potential for fraud exists, but again, he thinks fraud is not there, but you never know.

He does not expect a SEC investigation. Just his views, and perhaps he isn't correct. It is helpful to hear his views though. He certainly is disturbed by this but is expecting that the culprit is poor due diligence. Again, just his thoughts, we are early in this information stage, and we need to "stay tuned."

On another note, yet it rhymes, Nuuvera was purchased in July 2018. There were rumblings of disclosures of insider relationships not being disclosed. I am not familiar with how the investment community perceived this. The same analyst I referred to above mentioned, “Nuuvera was nasty. There were no legal requirements to disclose this, but it sure looked bad. I think companies need to do much better than "the bare minimum.”

Auditor is PWC.




Review of 1Q19 (August 31, 2018) financial reports:

Fully diluted shares on October 11, 2018 of 254,349,627. It is my understanding that option and warrant shares are not very material to the share count, and at this point I will not consider them in valuation work-ups.

$273M in cash. Excellent current ratio.

Shareholders’ equity of $1.5B. Tangible equity of $701M. There are “Capital assets” of $361M at 8/31/18, and based on some recent short discussions, these could be impaired. Hence, one could call Tangible equity to be $340M.

Nuuvera was purchased for ~$507M. I am concerned of faulty disclosures, and this could be part of the recent fraud accusations.

I have seen various potential revenue estimates for F2019 of an average of $279M, F2020 of $608M, and F2021 of $812M to $1,260M.

I have also seen shares outstanding projections of 248M for F2020 and F2021.

I have seen IFRS earnings per share of F2019 of an average of $0.14, F2020 of $0.35, and F2021 of $0.55. The “proforma earnings” are expected to be higher, with F2021 at $1.04, but I typically don’t put much credence in “proforma earnings.”

Could be a bargain, but a few caveats, which could make this a value trap:

1. Price multiple using F2021 revenues is 2.5 years out.

2. Entire sector might have crazy multiples, yet this is infant industry.

3. Hindenburg report could be correct, and this could be fraud ridden and truly go to zero.

April 2, 2018 ($8.62)

“I think the only thing is you may need to lengthen your time horizon to beyond FY19, which ends in May 2019, essentially the next year. Analysts project C$229mm for FY19 and C$651mm for FY20.

I like to look at price to tangible book. The tangible book value at 11/30 was about 386 million. If one were to assume all dilutive securities are exercised, this would bring in 30 million getting it to 416 million. Now, add 108 million net for the capital raise after the quarter. This gets to 524 million (Canadian). I am not sure of how Nuuvera will impact it (I think there will be some cash at a minimum), but let's just assume zero. If that's the case, then the stock trades at 4.6X (probably a little lower). This was all in Canadian dollars by the way. I think that is low compared to most peers in the Tier 1, but obviously not so low that it couldn't be lower.” AB 4/1/18

March 30, 2018 ($8.96)

Market Cap ~$2B

I will use the following assumptions, which are purely back of envelope and shooting from the hip, with no method, nor guidance, and just rough assumptions.

If we project Forward revenues of ~$100M in F2019 (11/30/19), I could see a potential market cap of $500M to $1B (almost ridiculous). Hence, we would need a share price of ~$2.27 CDN to ~$4.55.
CDN.

Hence in USD using conversion of 78%, I would consider buying for $1.78 to $3.55 USD.

I read investor deck (2/18), financials and MDA 11/30/17 and 2017 AR. Impressive company, yet no way in the world am I hitting this with current valuation of $2B. Perhaps I am missing something and will reconsider in future.
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