Faircourt Asset Management President Charles Taerk picks Aphria Inc (TSE:APH | OTCMKTS:APHQF | FRA:10E) as one of his current favourite cannabis plays. The company’s executive team, production efficiency, as well as their Canadian and international expansion capacity are all discussed. Smaller investment opportunities are also highlighted looking for the largest growth opportunities as Canadian legalization quickly approaches.

Transcript:

James West: Hey, welcome back to Midas Letter RAW! My guest, you might recognize him; he seems to have become a regular on the show. Charles Taerk is the co-manager? Manager, of the Ninepoint UIT Alternative Health Fund.

Charles Taerk: Well, good for you.

James West: Thank you.

Charles Taerk: It’s a team effort; Doug Waters and myself.

James West: I like that. Right, right, okay. So anyways, but you are one of the only institutional choices in terms of an active manager that is, you know, buying cannabis stocks.

Charles Taerk: That’s correct.

James West: And let’s touch quickly on, why would I invest in your fund in terms of performance?

Charles Taerk: Well, great. Year-to-date, we’re doing quite well; year-to-date we’re up close to 10 percent relative to the index or the large ETFs, which I think are still negative for the year. We’re an actively managed fund, and I think that’s really where the differentiation starts. So we’ve been trading in and out of names, we get out of names when we feel that they’re more well-valued at times; we can sit in cash; we also invest in some privates. So we’re giving you a different flavour for the alternative health space, not just cannabis, but other areas in alternative health such as health and wellness, vitamins, minerals, supplements, that whole demographic shift.

James West: Sure. Okay, so, clearly you have some names that you consider more attractive at this time in the whole evolution than others, and that changes over time?

Charles Taerk: Yes.

James West: So tell me, give me an example of one of your favourites now.

Charles Taerk: So, one that we continue to see value in is Aphria, and it’s one, it’s a name that has been in the news well over the year. Vic Neufeld is a very well-known executive in the Canadian public markets, used to run Jamieson Labs; very prominent in vitamins, minerals supplements. And a few years ago, left Jamieson and co-founded Aphria with some childhood friends in Leamington, Ontario. And what we find really interesting about Aphria is, it’s got all the building blocks that we talked about in the past. An executive team that has good experience; it’s now got the capacity to deliver both for the provincial supply agreements coming out, and is poised to go international; and it’s a very efficient producer. So it’s really putting together a well-executed business plan.

James West: Sure. And you recently visited their facility, which as I visited their facility as well, but my visit was probably 18 months ago, and from what you’re telling me, there’s been a rather comprehensive upgrade of the whole site?

Charles Taerk: Yeah, so we were there also less than a year ago and then came back; we were there last week. And what we see is a phenomenal progression. They told us what they were going to do, and now they’re doing it, which is great to see. When we were there last, they had just 50,000, 60,000 square feet of growing space; they now have over 300,000 square feet of operational cultivating space, and by the end of the year – this is at the Aphria One site in Leamington – they will be at a million square feet. So, building another 700,000 square feet onto what they currently have.

And it’s not just the amount of space, but it’s the quality of what they’re doing in the design. The extent of automation that’s going on there is going to allow Aphria to increase the throughput through their grow cycle and into their packaging, processing, fulfillment cycle; the level of automation, the tables are moving automatically through the grow area, through propagation to the grow area, and just a phenomenal amount of technology. And we got demonstrations on much of that last week.

James West: Very cool. So do you think that Vic Neufeld’s sort of pedigree with the Jamieson Labs experience – when he took over that company, it was kind of struggling for relevance, and within, I think it was a period of less than 10 years, he took it to above, was it, $14 billion worth of product sales?

Charles Taerk: Yeah.

James West: And so, do you think that’s kind of, that’s kind of the differentiator that the investor needs to consider when they’re looking for differentiated strategies among ACMPR –

Charles Taerk: Sure. So, as I went back: management team is very important, and Vic has some very unique skill sets. And I think Carlo and John, his co-founders, also bring different skill sets. So Vic, knowing the Shoppers Drug Mart and the pharmacy business aspect of distribution: really important. Although the pharmacies are not involved yet in the cannabis industry, they will be. I firmly believe that down the road, Canada’s pharmacy chains, whether it’s Pharmasave, Shoppers, etcetera, they will all be the pharmacy or distribution choice rather than how medical patients are getting their prescriptions right now. And that’s only a matter of time.

So with Vic understanding how pharmacies work, the distribution they have, it was no wonder that Aphria last fall got the first letter of intent from Shoppers Drug Mart for, call it, preferred distribution when that happens. So that’s really important.

And then when you look at John and Carlo, their experience in the farming business – able to take the scale and capacity of what’s required from a logistics standpoint and really build out the space at Aphria One is really important, because we see a lot of infill facilities being built, existing warehouse, existing industrial space, and you don’t have the same ability to design the flow of trucks in and out of the property, where deliveries are going to happen, how deliveries of nutrients are going to get delivered to the plants. So they’ve really started with a blank space with their land, and then they’ve repurposed it in a really efficient way.

James West: So is Aphria’s strategy, then, to focus on the medical patient and the pharmaceutical distribution channel, and not so much on the recreational side?

Charles Taerk: Oh no, I think they’re looking at both. Recently they’ve brought in more expertise at the executive level. I believe the gentleman’s name is Jakob Ripshtein, who used to be at Diageo. And so they’ve brought him in to deal with the distribution on the recreational side. Again, executive focus dealing with the liquor control boards across the provinces, because that’s where the primary distribution is going to be. So I think again, added more executive leadership to their company, and then they have the distribution agreement with Southern Blazer, which is the largest alcohol distributor in North America.

So they’ve got some real muscle on the distribution side, they’ve got great execution on the production side, they’re a low cost producer at $0.95 a gram, and they’re continuing to be profitable. You know, can’t harp on this point enough, because there’s a lot of skepticism out there that these companies don’t make any money. Aphria has been profitable for the last ten quarters; they’re the only ones in the sector. And really, we feel that they’re left out when people are talking about the top three names, and the valuation metrics they’re getting, Aphria trades at a relative discount.

James West: Sure. We’re looking at their stock price and their stock performance in the last quarter, and you certainly wouldn’t get a sense from what you’re saying that it’s being reflected in the share price at this time. Do you think that there’s a lack of awareness on the part of the market because some of the bigger companies, or the other companies, are making more noise that are getting the attention of the investor community?

Charles Taerk: Sure. I think it’s a combination of things. During the quarter it’s been pretty flat; a little bit of progress since April. Beginning of the year, they had a rough start. Everyone was doing quite well in January, and then there was a series of M&A activities. Their acquisition of Nuuvera, I think, was not well received. And so the stock came off considerably from end of January to the beginning of April, and at that point, that’s when we started to take a look at it once again and said, you know what? It’s now fallen to a point where it becomes more irresistible as an investment. And we started to go more work on it again, and we’ve done quite well, really, since April, moving forward. And I think going forward, again, it’s about execution. I think the management team is in place, I think they have executed to date in terms of getting the production going and getting capacity going, and I think they’re positioned for positive information going forward.

James West: Sure. Okay, so are there other companies that you could perhaps talk about, that might be a future Aphria?

Charles Taerk: Well, you know what? We haven’t talked much about Manitoba, but smaller province, doesn’t get a lot of news, but Delta 9 is an interesting player. It is not one that we own in the fund yet.

James West: Oh, okay. A fund manager not talking his book? There’s – [laughter]

Charles Taerk: Hey, I want to be an equal opportunity guy.

James West: I like that. Credibility.

Charles Taerk: It’s an interesting name, because again, it’s one of those names that doesn’t get a ton of attention. Smaller name, smaller footprint to be dealing with; they’ve got one of the four announced distribution deals in the province of Manitoba. They might get some more business west, in Saskatchewan or Alberta, and yeah, they seem to be doing things very efficiently. So, efficient production, and who knows where that takes them west of Ontario.

James West: You bet. Again, looking at their performance especially, they kind of participated in the beginning of the year bullishness – not really, though – and it’s been coming off since then.

Charles Taerk: Right.

James West: Again, it’s a case of being a smaller company in Manitoba, hard to get the attention of the North American audience or the global audience, so again, perhaps something that’s got a lot of compressed value in it?

Charles Taerk: Well, and that’s exactly the point. One of the other mandates that we have is a gold equities fund. And we use the analogy of what we’ve learned in gold mining to cannabis, although people are scratching their heads out there going, “What does this have to do?…” But it’s looking at management teams, knowing although this is a small asset, undiscovered, they might have a great management team, a great geologist who was somewhere else in his past and knows how to work that property, and they have people on the team that know how to do development. And, you know, a diamond in the rough.

Here in cannabis, you may have a team that is just using a smaller footprint, but they know what they’re doing, and if they’re able to execute, they’re going to become a takeover target.

We’re not here to love the companies we invest in; we’re looking for the biggest and best growth opportunities. So when you look at a company like Delta 9, here’s a company that’s turning itself around, and at some point, one of the incumbents, one of the larger companies, may offer to acquire it. So, could be a good payday.

James West: All right. Well, we’ll keep our eye on that.

Charles Taerk: Sure, you never know.

James West: Charles, as usual, a fountain of knowledge. Again, thanks for your participation. We’ll come back to you soon. Thanks for joining me.

Charles Taerk: Okay, thanks for having me on.

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