Scotiabank Finds Hindenburg’s Aphria Inc (TSE:APHA) Research Not “Fully Contextualized”

Benjamin A. Smith
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In a new equity research report written by Scotiabank and obtained by Midas Letter, Aphria Inc (TSE:APHA) (NYSE:APHA) (FRA:10E) appeared to receive a big boost of confidence from the Big Six bank. The report—which shall remain unlinked in lieu of permission from the authors—casts a favorable view of Aphria’s LATAM acquisition strategy recently castigated by Hindenburg Research.

The analysis within is sectioned into four different components, or Key Points.

The first relates to video regarding various LATAM assets sprouting-up all over social media. In the analysts’ view, video footage of Argentinian assets, specifically, “matches well with the photos taken by HIR (Hindenburg Research), but shows much more in the way of distribution operations than was indicated by the report.”

The inference is that Hindenburg specifically elected to show unfavorable images and/or omit certain assets without balanced representation, which of course implies biased motives. Recent imagery strewn social media would appear to support that assertion.

The second Key Point discussed relates to Hindenburg’s assertion that “Aphria recently spent over C$280 million” on its LATAM portfolio. While that’s technically true insofar that $280 million was the transaction purchase price at closing, Aphria had no control over the subsequent movement of its share price. The research authors believe—and rightfully so in our opinion—that, “it is more appropriate to use the negotiated $193M price tag, as this was the value management had control over at the time they entered the transaction.”

Hindenburg’s use of the post-deal $280M price tag, as opposed to the $193M original deal cost, represents a 45.07% mark-up which was completely out of Aphria’s control. We leave it to readers to decide whether there was motive to inflate that top-line value.

The third Key Point relates to the $145M transaction value ascribed for Jamaican assets. Scotiabank believes “HIR used the 52% allocation Haywood suggested to
Scythian in its fairness opinion dated July 16, 2018 (i.e., 52% of $280M = $145M).” The thing is, Aphria never actually provided a breakdown of its LATAM asset valuations in each region. Following discussions with company management, Scotiabank believes Colombia is the crown jewel in this transaction, followed by Argentina and then Jamaica. Furthermore, they estimate the value of Jamaican assets “is at least $100M lower” than the value represented by Hindenburg Research.

The ramifications of such a determination are clear. By inflating Aphria’s Jamaican cost base—along with exploiting optics of clearly under-developed Caribbean properties—Hindenburg painted a portrait of Jamaican assets that made little sense from a valuation perspective. The problem is, Aphria paid much less than Hindenburg claimed ($145M), making the transaction more palatable and throwing further doubt on its quality of ‘research’.

Lastly, Scotiabank analysts break up Key Point #4 in two parts.

Point #4a suggests that production economics of the transaction cost was reasonable. In the bank’s words:

“When Aphria completes its initial Colombian build-out to 30,000 kg, and assuming just $1/g of EBITDA, as well as a conservative 10x multiple, Colombia alone could be worth $300M, or 1.5x the cost of the entire acquisition. Keep in mind that Aphria plans to expand production to 50,000 kg.”

Nothing more to add to that.

Point #4b is affirmation that the value of transaction costs is in the licenses—not just physical assets. The bank notes that Aphria’s transaction price was in-line with similar purchases made by Canopy Growth and Aurora Cannabis, which is public knowledge. Notably, the bank goes one step further, by actually characterizing Aphria’s LATAM purchase as downright cheap on a comparative basis:

“These transactions indicate to us that Aphria’s purchase price of $193M for Colombia, Argentina, and Jamaica is, at the very least, rational and perhaps even relatively inexpensive.”

This last quote, without question, will stick as a key takeaway in this whole equation.

One of analysts attached to the report, Oliver Rowe, certifies that the views expressed therein reflect his personal views, and affirms no part of his compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by him in the report.

Final Thoughts

Scotiabank’s research report undoubtedly cast Aphria’s LATAM dealings in a favorable light. It has uncovered further portrayal of bias—which is describes as not “fully contextualized” with respect to Aphria’s purchase of LATAM Holdings—and brings into question how Hindenburg erroneously came to valuation conclusions.

As time has transpired, we believe Aphria’s position has strengthened in this whole affair. Scotiabank’s research provides important re-affirmation of that position, and should assuage lingering investors doubts with Vic Neufeld’s line-by-line rebuttal expected out shortly.

Access to Scotiabank’s Equity Research page can be found at the following link. Their rating on APHA stock remains under review pending Mr. Neufeld’s response.

h/t to @Monteviale3 for providing the original research in prompt manner.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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