Analyst Calls Tilray-Aphria Marijuana Merger a ‘Perfect Match’ and Upgrades Shares

Last December, two Canada-based pot growers, Tilray Inc. (NASDAQ: TLRY) and Aphria, announced a merger that closed Monday, with Tilray the surviving company at a market cap of around $8.2 billion. On Thursday, Tilray stock closed at $14.15, down more than $4 from its opening price on Monday and the market cap had fallen to around $6.3 billion.

Some of that loss was being recovered Friday morning, as Tilray stock traded up sharply following an upgrade and raised price target from Jefferies. Analyst Owen Barrett called the merger “the perfect match” between a company (Tilray) with a leading brand in Canada and a company (Aphria) that had a major deal to supply Germany with medical cannabis.

Barrett raised his Underperform rating on the stock to Buy and increased his price target from $4.77 to $23. At the current price, Jefferies’s target implies an upside to Tilray’s share price of 50%. The price target also implies a 12-month enterprise value-to-sales (EV/sales) ratio of 13.2 times compared to a current EV/sales ratio of 8.2 times. Tilray’s growth profile is such that Jefferies forecasts an EV/sales ratio of 5.9 times in 2024.

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Tilray-Aphria needed to prepare for a federally legal U.S. recreational marijuana market:

Although the Canadian industry is set to accelerate from here, and although the longer term opportunity in Europe could be very sizeable, the cannabis market that really is the “holy grail” when it comes to long term value creation, and the market that a cannabis company needs to have a robust presence in if it wants to be a global leader, is the US.

To attach some numbers to that, Jefferies estimated that the entire Canadian market totaled under $2 billion last year and the European market totaled around $280 million. California’s total market for legal weed last year reached $4.4 billion, and New York state, which recently legalized recreational cannabis sales, could reach $4 billion in 2023.

Barrett adds, “It is realistic to think that Canadian companies could enter the US in 2022. While this is unlikely to be full federal legalization at first, this could likely follow a few years later down the line.” Jefferies thinks that Tilray could capture “at least” 2% of the U.S. market by 2029, equivalent to an enterprise value of $2.7 billion. If the company were to capture 5% of the U.S. market, Tilray’s enterprise value would run to nearly $6.6 billion in U.S. sales alone.

Among other Canadian cannabis companies Jefferies mentions in this report, only one other gets a Buy rating: Organigram (price target is $3.79). Aurora Cannabis (price target is $4.59), Canopy Growth (C$29.09), Cronos ($5.00) and Hexo ($0.75) are all given Underperform ratings.

Shortly after Friday’s opening bell, Tilray stock traded up more than 12% at around $15.85. The stock’s 52-week trading range is $4.41 to $67.00, and the consensus price target on the stock is $18.98.

The company is scheduled to report March quarter results before markets open Monday. The Tilray-Aphria merger did not close until April 30, so we’ll have to wait until the June quarter ends to see the start of the impact of the deal on the company’s results.

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