Scotia Bank Report About APHRIA

Tuesday, December 11, 2018, Intraday Flash

ANALYST TEAM

Oliver Rowe, MBA, CFA | Associate Analyst

416-863-5907

Scotia Capital Inc. - Canada

Ben Isaacson, MBA, CFA | Analyst 416-945-5310

OUR TAKE: We spoke at length with Aphria's CEO/CFO and are more convinced that Hindenburg Research (HIR) may not have fully contextualized each of its allegations with respect to Aphria’s purchase of Latam Holdings. We highlight a few of these below. However, until Aphriasatisfactorily responds directly to each

Scotia Capital Inc. - Canada
COVERAGE SUMMARY
Rating 1-Yr. Target Return
allegation we maintain our Under-Review rating.

KEY POINTS

#1: Aphria video footage shows a more fulsome view of asset quality. Footage

of Colombia, Argentina, and Jamaica all show activity on the ground. In Argentina, the video footage matches well with the photos taken by HIR but shows much more in the way of distribution operations than was indicated by the report.

#2: Total consideration of $280M. When the LATAM Holdings transaction was announced, Aphria was to pay Scythian Biosciences 15,678,310 shares and assume

$1M in debt, valuing the total transaction at $193M using a 20-day VWAP. We think HIR used a $280M price tag calculated fromAphria's share price when the transaction closed as cannabis shares had climbed materially in the interim. We believe it is more appropriate to use the negotiated $193M price tag, as this was the value management had control over at the time they entered the transaction.


#3: Colombia is the key asset, not Jamaica. With respect to the $145M transaction value for Jamaica, we believe HIR used the 52% allocation Haywood suggested to Scythian in its fairness opinion dated July 16, 2018 (i.e., 52% of $280M = $145M). While thls approach is not entirely unreasonable, Aphria has never publicly disclosed the actual breakdown of how it valued each region. After speaking with management, we think the crown jewel from the company's perspective is, in fact Colombia, followed by Argentina, and then Jamaica. If true, this paints a materially different picture. Instead of an implied Jamaica value of $145M as HIR suggests, we estimate the value is atleast


$100M lower. Accord/ng/y, we don) think it's a coincidence that this is also the order in which the regions were listed in Aphria’s press release.


Production economics suggest the transaction cost was reasonable. When Aphria completes its initial Colombian build-out to 30,000 kg, and assuming just $1/g of EBITDA, as well as a conservative 10x multiple, Colombia alone could be worth $300M, or 1.5x the cost of the entire acquisition. Keep in mind that Aphria plans to expand production to 50 000 kg.


#4b: Similar transactions indicate the valuation is reasonable. The value of international transactions tends to be the licenses, and not just the physical assets. Similar transactions we’ve seen have also focused on licenses, such as Canopy's Colombian acquisition for >$150M and Aurora's acquisition in Colombia and Uruguay for $290M. These transactions indicate to us that Aphria’s purchase price of $193M for Colombia Argentina, and Jamaica is. at the very least, rational and perhaps even relativelyinexpensive.

Dissemination: December 11, 2018, 11:10 ET. Production: December 11, 2018, 10:59 ET