Aphria beats revenue expectations by 23%, 4Front announces $200M EBITDA target & more

The second-quarter earnings season started off with a bang and a focus on profitability. Here are some of the highlights from this week:

Aphria shocks with 13.5% margin, expresses interest in CannTrust

The biggest news this week came Thursday when Aphria beat fiscal fourth-quarter revenue expectations by 23% and guided to a 13.5% EBITDA margin for fiscal 2020, which ended in May for the company. That was nearly double expectations and a solid margin for any consumer company.

By comparison, Hain Celestial – the former company of Aphria CEO Irwin Simon – earned a 10.4% adjusted EBITDA margin for fiscal 2018.

Investors responded positively to the results, with the stock price rising 41% on Friday.

In an interview with Bloomberg, Simon said Aphria would be interested in acquiring the assets of beleaguered CannTrust, which announced Wednesday that its board was considering “strategic alternatives” – including the possibility of a sale after firing its CEO for an unlicensed cultivation scandal.

With a close of CA$9.67 on Friday, Aphria now trades at 3.5X revenue and 25X EBITDA on the midpoint of the guidance (CA$650 million-$700 million revenue, CA$88 million-$95 million EBITDA).

Aphria Valuation – in CA $ Convert Convert
All in millions CA $ except shares & multiple As Debt As Shares
Stock Price                 9.67               9.67
Shares Outstanding               253.9              291.2
Market Capitalization               2,455              2,816
Pro Forma Cash & Equivalents                  610                610
Debt                  489                  67
Net (Cash)                 (121)               (543)
Enterprise Value               2,334              2,273
Midpoint Revenue Guidance                  675                675
EV / Revenue                   3.5                 3.4
Midpoint EBITDA Guidance                    92                  92
EV / EBITDA                 25.5               24.8

Introducing 4Front and its $200 million EBITDA target

After 4Front Holdings and Cannex Capital Holdings completed their previously announced merger, CEO Josh Rosen hosted a conference call with three key takeaways:

  • EBITDA target of $200 million: The company “won’t be satisfied” if this takes longer than three years to achieve.
  • Price compression in mass adult-use product is “inevitable” as brand loyalty is “fleeting” amid increasing supply and declining prices.
  • The U.S. Department of Justice review took up about 20%-25% of management attention. Other cannabis executives looking at large deals should keep this in mind amid increasing DOJ antitrust scrutiny.

The new 4Front will start trading on the Canadian Securities Exchange on Tuesday, Aug. 6, with the ticker symbol FFNT.

More M&A and a shift to cash from stock

Cronos Group moved into the U.S. hemp market with the announced acquisition of four Redwood Holding Group subsidiaries, which make CBD-infused consumer products under the brand Lord Jones.

Cronos will pay $300 million, of which only $75 million is payable in shares and $225 million is in cash. This continues two trends:

Cronos shares traded up 8.5% on the news.

Hawthorne reducing discounts in 2020

Scotts Miracle-Gro raised its guidance for Hawthorne, its indoor and hydroponic division, in its fiscal third-quarter report on Tuesday based on stronger than expected trends.

Management noted on its analyst call that organic revenue in California is up 15% through June, Michigan is up 35%, Florida is up 50% and Massachusetts is up 35%.

Management also noted the aggressive discounting strategy introduced in fiscal 2019 to drive revenue growth has worked, but plans are in place to dial back the promotions to expand margins as the competitive environment is more “benign” while still driving high single-digit revenue growth in 2020.

So, some price relief will be coming in 2020 if you’re a competitor to Hawthorne, and higher prices if you’re a customer.

Scotts ended the week up 7% on its earnings release.