Afria profits did not come from selling marijuana

Aphria Inc.'s profit is about the paper, not the pot.

Canadian cannabis manufacturer reported its second consecutive quarter of profit early Tuesday, posting a net income of $ 16.4 million on sales of $ 126.1 million. But the company's profits were not the result of a massive fall in the cannabis business, but instead came from Africa's previously sliding stock price and a shift in ownership in another company.

U.S.-traded shares of Aphria

APHA, + 24.54%

APHA, + 15.46%

ended Tuesday's regular session with a 24% gain, but had previously fallen just over 6% in the quarter it reported Tuesday. The fluctuations in Aphria's share price up to Tuesday's report boosted the company's earnings by $ 14.2 million due to the way the Canadian cannabis company values ​​its convertible debt.

Valuing the convertible bond relates directly to the company's stock price, which closed at $ 6.26 at the end of August, though it traded as low as $ 5.02 before reporting fourth-quarter results.

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Another paper gain that helped push Aphria out in the black quarter was a huge change in accounting methods on uses to value its investment in Althea Group Holdings Ltd.

AGH, + 4.72%

. Aphria reduced its stake and relinquished the board seat and "ability to participate in Althea's political decision-making" during the quarter, enabling management to post $ 24.3 million in profits, which it included as paper gains in its long-term investments.

Combined with the value changes allocated to convertible bonds, Aphria left about $ 30 million in paper gains to arrive at the profitable quarter.

Cannabis revenue itself rose to $ 30.8 million from $ 28.6 million in the fourth fiscal year. quarter. The company revealed that a fire in August during its Broken Coast business in British Columbia – which CEO Irwin Simon has previously called its business by the highest margin – had a $ 1.5 million impact "that would make up its balance sheet this year , "said executives at Tuesday's earnings conference. Aphria did not reveal the cause of the fire in the conversation.

Executives also reiterated the company's fiscal 2020 guidance of $ 650 million to $ 700 million in revenue, "slightly more than half" coming from the company's CC Pharma drug distribution business. CFO Carl Merton said during the conference call that Aphria expects $ 1 billion in annual Canadian marijuana revenue by the end of calendar year 2020 (Aphria's fiscal year ends in May).

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Seaport Global Securities analyst Brett Hundley called Tuesday's results "solid" in the middle of a "marketplace which badly needed positive data points. ”Hundley points to a broad decline in the sector in recent trading days, spurred by a revenue warning provided by Hexo Corp.

HEXO, + 8.47%

HEXO, + 0.60%

last week.

"In our view, the company is optimistic about FY2020 guidance, and we are leaving our projected estimates well short of expected, as a result," Hundley, who has a target price of $ 8 and a purchase valuation in the name, wrote in a Tuesday note. "That being said, we think this is a company that is armed and ready to prove us wrong, while also being properly placed if we were to prove ourselves right."

GMP Securities analyst Justin Keywood also wrote in a note to clients that Aphria's results were "solid" and that they were lining up with the "shuttle" that his team had heard about improvements in operations and customer loyalty, among other things.

Jefferies analysts Owen Bennett called the results "strong" and said in a note to clients that the most promising revenue was Aphria's gain in market share – conference call leaders said they had captured a 12% stake in Ontario – combined with continued profitability and repetition of sales guidance. Bennett has a purchase of the name with a price target of $ 11.

Aphria shares have fallen 65% over the past year, such as the S&P 500 Index

SPX, + 1.00%

has received 7.8%. ETFMG Alternative Harvest ETF

MJ, + 6.57%

who among other things traces a basket of cannabis stocks, has fallen 53% over the past year. Horizons Marijuana Life Sciences Index ETF

HMMJ, + 5.12%

has fallen 55% over the past year.

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