Compared with Canada’s other leading pot producers, Aphria stock trades at a discount. It deserves a premium, argues Stifel analyst W. Andrew Carter, given Aphria’s strong balance sheet and cash flows. So in a Sunday note, Carter raised his rating on Aphria stock from a Hold to a Buy.

Aphria shares (ticker: APHA) could rise by more than a third, says Carter, to $5.90 a share. In premarket trading Monday, the stock was up 3.7%, to $4.46.

The stocks of rivals like Canopy Growth (CGC), Aurora Cannabis (ACB) and Tilray (TLRY) go for an average of 5.4-times their predicted sales for 2021. Aphria’s trades for just 4.4-times its predicted sales. As profits grow at Aphria, the Stifel analyst thinks investors will award it a premium multiple of 6-times sales.

Canopy and Aurora stumbled badly in their ambitious expansions, and burned through mountains of cash. By contrast, Aphria has nearly C$500 million (or US$370 million) in available cash on its balance sheet.

Now that the populous province of Ontario is beginning to license enough cannabis retail shops, Carter predicts that Aphria will grow its sales handily by just maintaining its current market share of some 12.5% of Canada’s sales. By mid-2022, he thinks Aphria will achieve positive free cash flow, including all capital expenditures.

Later this month, Aphria will report the results for its fiscal year that ended May 2020. Carter believes that sales doubled in the year, to C$530 million, with earnings a bit above break-even. He also expects the company to announce write-downs of the Latin American ventures that brought down Aphria’s former chief executive Vic Neufeld—who resigned after a short seller’s report exposed Neufeld’s personal stakes in the acquired ventures. The short report changed Aphria for the better, Carter says.

By May 2021, he predicts that Aphria sales could grow another 21% to C$640 million, with a net loss but positive cash flow. In the May 2022 fiscal year, sales could grow 29% to C$830 million, yielding a small profit of C$0.06 a share and some C$100 million in operating cash flow.

“We believe the fundamental performance will drive a re-rating for the shares,” Carter concludes, “manifesting in a premium to Canadian cannabis peers.”

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