Can Aphria's share price rally after depressed earnings see the stock plummet?

Medical marijuana producer Aphria [APHA] opened down nearly 13% on Monday after posting a net loss of C$108.2m for the three months ending February, despite revenues booming to C$73.6m, a seven-fold increase from a year earlier.

It’s a sub-par performance for the Ontario-based company, which had managed to grow EPS from C$0.01 in 2016 to $0.18 in 2018. Loss per share was C$0.08 during the quarter, against analysts’ estimates of a positive, if slim, C$0.03.Aphria 1-year share price performance, CMC Markets, 17 April 2019

Revenue from cannabis sales rose 72% to C$17.5m, while the pivot towards international distribution, through the acquisitions of Germany’s CC Pharma and Argentina’s ABP last year, brought in some C$57.6m in new income.

But packaging costs ballooned to C$1.98, from C$0.97 a year ago, as a result of stricter requirements around labelling and packaging under Canada’s Cannabis Act. “We made a decision to have as much product on the shelf as we could on legalisation date [17 October 2018],” CFO Carl Merton told analysts. “So we didn’t necessarily buy the best-sourced packaging. We’re doing that now. We’ll ship into [the new packaging] probably in November, December.” He added that costs would come down as the old inventory is shipped out and automation is introduced in the packaging process.

Aphria was also forced to record a C$50m non-cash impairment on assets in LATAM Holdings, as a review mandated by the Ontario Securities Commission highlighted lower margins and higher-than-expected expenses in the entity, which Aphria acquired late last year for C$195m. Aphria’s investment in LATAM is now valued at approximately C$225m.

Aphria stock vitals, Yahoo finance, 17 April 2019

Short-seller firm Hindenburg Research wrote on Twitter that the write-down was not a surprise, as it had already deemed the acquisition as overvalued. “We expect more to come in subsequent quarters”, the tweet read.

What now?

Merton said the next quarter would look “fairly similar” to the last one, but improvements should pick up after that. The board reiterated a target of C$500m in revenues for the full year, and C$1bn by 2020. “There’s nobody out there … that will grow cannabis in the way we’re going to grow it,” said interim CEO Irwin Simon, who took over in late December.

“There’s nobody out there … that will grow cannabis in the way we’re going to grow it” - CFO Carl Merton

Shortly before its earnings release on Monday, Aphria said bigger rival Green Growth was terminating its hostile takeover bid, which Aphria’s management had already rejected in February for undervaluing the company and not being conducive to significant synergies.

Aphria is now set to get a short-term cash boost of C$89m as part of undoing the cross-shareholding arrangements that had been laid the ground for Green Growth’s bid. But management did not exclude future US collaborations with Green Growth.