Noel Atkinson, CFA

416-343-3352 | natkinson@clarussecurities.com

Aphria Inc. Unshackled: Sale of Liberty Health

APH-TSX: $18.48
Rating: Buy
Stake Creates New Opportunities –
Target: $31.00 (was $25.00) Raising Target Price to $31.00 Per
Share
Valuation
Fiscal Year (May) FY17 FY18 FY19e FY20e
September 6, 2018
Revenue ($MM) $20.4 $36.9 $192.7 $796.6
Previous N/C N/C
Adj. EBITDA ($MM) $6.1 $5.7 $47.4 $315.7
Previous N/C N/C
WILL BE PAID $59.1MM (~$0.92/SHARE) FOR
Calendar Year CY17 CY18e CY19e REMAINING 64.1MM LIBERTY HEALTH SHARES
Product Shipped (Kg) 4,256 19,732 116,340
Previous N/C N/C Aphria announced this morning that it has sold all 64.1MM
Revenue ($MM) $30.6 $115.8 $618.3
shares of Liberty Health Sciences (CSE: LHS, Speculative Buy,
Previous N/C N/C
Adj. EBITDA ($MM) $9.1 $15.3 $242.2 $1.75 PT) for consideration of $59.1MM (~$0.92/share) in the
Previous N/C N/C form of a 5-year, 12% interest promissory note. The purchase
Adj. EBITDA Margin 30% 13% 39%
price was at roughly a 1% discount to yesterday’s closing price
Diluted EPS $0.21 $0.02 $1.20
Price/Sales 147.5x 39.0x 7.3x for LHS shares.
EV/Adj. EBITDA 454.4x 271.4x 17.1x
P/E 86.3x 867.3x 15.4x Aphria’s LHS shares had been in escrow under CSE
Stock Data
requirements since LHS completed its public listing. The
Price C$18.48
52-Week Range C$5.92 - C$24.75 Company had a previous arrangement to sell the LHS shares as
Avg Daily Vol (3-Mo) 5,252,507 they exited escrow in tranches every six months through mid-
Shares Basic / Diluted (pro forma, MM) 232.0 / 244.3
2020. We understand Aphria was able to obtain “exemptive
Market Cap (F/D, C$MM) $4,515
Net Cash (pro forma, C$MM) $268 relief” from the CSE in order to facilitate this transaction as a
Potential Cash from Option/Warrant Exercise (C$MM) $98 single event.
Enterprise Value (pro forma, C$MM) $4,149
Mgmt & Dir. Ownership (pro forma) 7% We believe this eliminates a key impediment that had
Fiscal Year End May 31
prevented Aphria from cross-listing on the NYSE or NASDAQ.

In addition, we have been of the belief that any strategic

investment into Aphria by a third party (i.e. a pharma, tobacco,
liquor or other consumer products company) with a U.S. listing
or has U.S. operations would be hindered by Aphria’s
ownership of LHS shares. That impediment is now also
removed.

Aphria retained an option for 5 years to purchase back the LHS

Company Profile shares, as it did for the last tranche of LHS shares sold, which
Aphria is a Licensed Producer (LP) of medical cannabis that
would be conditional on cannabis being “federally legalized” in
sells direct to registered patients across Canada. It was the the U.S. and the TSX approving the exercise of the option.
first Canadian LP to exclusively utilize greenhouses, and is one
of the lowest-cost producers in the Canadian industry. Aphria
has current production capacity of 35,000 kg per year, and
plans to expand to 255,000 kg/year by early CY2019.
 Aphria Inc.
APH-TSX

RAISING OUR TARGET PRICE TO $31.00 PER SHARE AS WE BOOST OUR TARGET
MULTIPLE
We believe Aphria’s share price has been restrained versus many of the large LP peers because of its
ownership of LHS shares, which was seen as holding back Aphria from undertaking strategic initiatives
to boost shareholder value (i.e. NYSE or NASDAQ listing and/or strategic investment by a
pharma/tobacco/liquor company) that have been very successful for firms such as Canopy Growth
(TSX: WEED/NYSE: CGC, NR), Tilray (NASDAQ: TLRY, NR) and Cronos (TSX/NYSE: CRON, NR).

Aphria is well-positioned both in Canada and internationally relative to the peer group:

• Has announced adult-use supply agreements with seven provinces (2nd-most after Canopy);

• Has announced supply agreements or purchase orders for 23,070 kg, 3rd-most after Canopy
and Aurora (TSX: ACB, NR) and more than 4x higher than Tilray;

• Has one of the largest product margins of any LP selling into the Canadian medical market
($8.42/g average net selling price versus $0.95/g reported cash production cost in their
May-2018 quarter);

• Had the fourth-highest inventory value of any LP as of the most recently-reported quarter;
and

• Has international activities in Europe, Australia, Latin America, the Caribbean, and Africa.

Our estimates are unchanged.

Our tracking group of larger Canadian LPs with fully-diluted market caps in excess of C$1 billion
currently trades at an average valuation of 79.6x CY2019e EV/Adj. EBITDA. In comparison, Aphria is
currently trading at 17.1x our CY2019e EV/Adj. EBITDA.

The removal of a significant structural issue that we believe was hindering certain opportunities to
create shareholder value leads us to raise our target multiple to 25x (from 20x) FY2020e (May) EV/Adj.
EBITDA. Our 12-month target price increases to $31.00 per share (from $25.00). Our target multiple
reflects our outlook for aggressive growth in revenue and Adj. EBITDA over our forecast period. We
reiterate our Buy rating.

Figure 1: Table of Comparables (in $ Millions except per-share items)

Note: NR = Not Rated, nmf = not meaningful, NEG = Negative. Tilray share price, market cap, balance sheet and
EV data are presented in US$.

2 of 4 September 6, 2018
 Aphria Inc.
APH-TSX

Source: FactSet; Clarus Securities Inc. estimates for Aphria Inc.

Target Price Calculator: Our 12-month target price is calculated as 25x FY2020e (May) EV/Adjusted
EBITDA.
Key Risk to Target Price: Please refer to the risks disclosed in the initiating report dated December 19,
2014.

September 6, 2018 3 of 4
 Aphria Inc.
APH-TSX

Clarus Securities Equity Research Disclosures

Aphria Inc.:
The analyst has visited this company’s facilities in Leamington, Ontario. No payment or reimbursement was received from the
issuer for the associated travel costs.
Within the last 24 months, Clarus Securities Inc. has managed or co-managed a public offering of securities of the Company.
Within the last 24 months, Clarus Securities Inc. has received compensation for investment banking services with respect to the
securities of the Company.
Liberty Health Sciences Inc.:
Within the last 24 months, Clarus Securities Inc. has managed or co-managed a public offering of securities of the Company.
Within the last 24 months, Clarus Securities Inc. has received compensation for investment banking services with respect to the
securities of the Company.
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Equity Research Ratings
Buy: Attractively valued and expected to appreciate significantly from the current price over the next 12-18 months.
Speculative Buy: Expected to appreciate significantly from the current price over the next 12-18 months. Financial and/or operational risk
is high in the analyst’s view.
Accumulate: Attractively valued, but given the current market price, is expected to appreciate moderately over the next 12 -18 months.
Hold: Fairly valued and expected to trade in line with the current price over the next 12-18 months.
Sell: Overvalued and expected to decline from the current price over the next 12-18 months.
Under review: Pending additional review and/or information. No rating presently assigned.
Tender: Company subject to an acquisition bid: accept offer.
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