NYSE Listing Assured
Aphria filed a form 40-F with US regulators today to list on the New York Stock Exchange.
The company will be only the fifth cannabis stock with a dual listing in both Canada and the US.
As Grizzle explored in Don’t Underestimate the Power of a US Cannabis Listing a US listing has historically led to a 30%-45% increase for the stock over the next two weeks.
Longer term, US-listed names trade at a huge premium to their Canadian peers, giving a valuation uplift to any licensed producers that are willing to navigate the US regulator hurdles.
Aphria should see sustained buying and a higher stock price through the end of the year for the following four reasons.
- NYSE listing news will stoke positive share flows.
- Aphria is at a huge discount to US peers, making it especially attractive to US investors
- Aphria makes a perfect long/short trade for Hedge Funds
- Aphria provides big institutions valuation cover to start dipping a toe into cannabis
NYSE Listing News Positive for the Stock
The news by itself has been enough to push licensed producer stocks much higher in the past.
Cronos increased 44% from when the listing was announced to the short-term peak in the stock two weeks later.
Canopy also had a big move, up 30% in less than two weeks.
Given that these stocks were both trading at much higher multiples than Aphria is today, we expect similar or better stock performance for Aphria over the next few weeks.
Stock Increase from Listing Announcement Date
Source: Yahoo Finance, SEDAR
Aphria Trades at Massive Discount to US Peers
There is no subtle way to put it, Aphria is a bargain compared to peers.
US-listed licensed producers trade at 37x EV/EBITDA on average compared to Aphria at only 8x.
Even if we remove Tilray, which some consider overvalued, US names still trade at 24x.
Aphria should receive a re-rating once US investors begin comparing it to US peers.
Every 1x multiple increase is worth $1.90/sh of upside, presenting huge optionality once the stock opens on the NYSE.
EV/EBITDA Multiple In 2020
Source: Grizzle Estimates
Aphria Provides a Perfect Long/Short Trade for US Hedge Funds
Buying one stock while shorting another is called a pair trade.
Pair trades allow an investor to avoid the riskiness of cannabis stocks compared to the rest of the market and only bet on the fundamental differences between two specific licensed producers.
For example, even if all cannabis stocks are falling, as long as the stock you are long falls less than the stock you are short, you are making money anyway.
Aphria provides a perfect long, while Tilray is our preferred way to play the short side of the trade.
Aphria trades at a deeply discounted multiple and generated positive EBITDA for 11 quarters in a row while all its peers were deeply in the red.
The attractiveness of an Aphria pair trade will drive buying volume from hedge funds in our view
Aphria Provides Institutions Valuation Cover
The main reason cited by big institutional investors and hedge funds for not buying cannabis stocks is valuation.
It’s very hard to explain the upside in a stock to clients when it is more expensive than almost all other stocks in North America.
Institutions look at US cannabis names as a basket and Aphria screens as a screaming buy compared to peers no matter which metric you look at it.
Looking at the cannabis multiple you pay divided by growth of funded capacity Aphria screens very inexpensive.
This metric tells you how much you’re paying for each unit of growth.
EBITDA Multiple / Funded Capacity Growth to 2022
Source: Grizzle Estimates, SEDAR
Couple this chart with Aphria’s stock multiple at 1/4 of US cannabis peers and you have ammunition for a portfolio manager to make a real case to their bosses that buying Aphria is a prudent way to gain exposure to an attractive high growth industry like cannabis.
Even a small amount of institutional fund flows could have a big impact on Aphria’s stock debut on the NYSE.
Aphria Should Start Trading by the End of October
Looking at the timeline for the other three licensed producers with dual listings, Aphria should start trading on the NYSE by the end of the month or sooner.
Aurora is listing 12 business days after their 40-F filing. On the other hand, Cronos took only 3 business days from filing to listing, while Canopy Growth listed 6 business days after filing the 40-F.
With a US stock exchange listing imminent and a substantial valuation discount to peers, we recommend investors make Aphria a core part of their portfolio.
In the interest of full disclosure, employees of Grizzle personally purchased and currently own stock in Aphria, Inc. See the Content Disclosure section here on our Terms and Conditions page for more details.
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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.