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Dec 4, 2018

Aphria analysts scrambling in wake of short-seller report

Aphria shares fall despite responding to short-seller report

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Analysts are raising concerns on Aphria Inc. (APHA.TO) (APHA.N) amid a 30 per cent plunge in its shares in the past two days, following a short-seller report regarding the Canadian pot producer’s transactions in Latin America.

GMP Securities and Bank of Nova Scotia analysts have placed their ratings of Leamington, Ont.-based Aphria “under review,” while the Bank of Montreal revised its price target of the company’s stock to $9 from $22 after the short-seller report was released Monday. Canaccord Genuity also lowered its price target on Aphria’s shares to $18 from $24.50 while reiterating its “speculative buy” rating on its stock.

“We believe that management’s credibility may have been impacted by the allegations raised in this report. It is unclear at this point how the company will re-establish trust with investors,” GMP analyst Martin Landry wrote in a note to clients.

Quintessential Capital Management and Hindenburg Research published a report that alleges Aphria acquired foreign companies in Jamaica, Argentina and Colombia at "vastly inflated" prices that appear to be “largely worthless.” Both QCM and Hindenburg have taken short positions in Aphria.

In a series of statements, Aphria said it “unequivocally stands behind” the company’s Latin American operations and described the report’s allegations as “a malicious and self-serving attempt to profit" with "misrepresentations and distortions" about its business.

Previously, GMP had a $22 price target with a “buy” rating on Aphria’s shares, while Scotiabank rated the company as “sector outperform” with a $25 target. BMO rated Aphria as “market perform” with a $22 price target prior to its revision late Monday.

Scotiabank analyst Oliver Rowe, who also placed his rating on Aphria under review, said the report “raises too many questions and concerns for us to remain comfortable taking an investment view on the company.”

In a report, BMO analysts Tamy Chen and Peter Sklar noted that there is likely heightened investor concern surrounding Aphria's acquisitions due to the company's previous purchase of Nuuvera in March for $450 million. The deal faced scrutiny after it was revealed that a number of senior officers and directors of Aphria were also shareholders of Nuuvera.

“We have not yet had the opportunity to speak with Aphria management regarding these concerns,” the BMO analysts said. “At this time, we are unable to fully assess the merits of investor concerns surrounding the acquisition of these assets. However, we believe there will be considerable uncertainty surrounding the stock as a result of these investor concerns.”

Canaccord Genuity analyst Matt Bottomley said in a report released Tuesday that despite revising its price target given the “increased uncertainty” brought forward from the short seller report, he continues to see Aphria’s shares trading at “good value at current levels.”

“The report also alleges that Aphria Insiders held undisclosed economic interests in financing vehicles prior to being acquired,” Bottomley said in the report. “The company has categorically denied these allegations to us. While we have no way to assess the validity of the claims, even after discounting our valuation to reflect higher risk, we still see good value at current levels.”

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