Aphria (Aphria Stock Quote, Chart, News: TSX:APH) is a low-cost producer and an industry leader in the space with plenty of upside, says M Partners analyst Mason Brown.

In a research report to clients this morning, Brown initiated coverage of Aphria with a “Buy” rating and a one-year price target of $6.10, implying a return of 59 per cent at the time of publication.

In the early days of the medical marijuana space, Aphria has already distinguished itself as a profitable licensed producer (LP). Earlier this month, the company posted Q1, 2017 results that delivered earnings of $895,269 on revenue of $4.37-million. The numbers were a solid beat over the same period a year earlier when it lost $476,825 on a topline of $950,740. The company posted EBITDA of $1.05-million. The results followed on Q4, 2016 results in which Aphria earned $1.3-million on revenue of $2.77-million.

“Aphria continues to deliver on all operating metrics,” said CEO Vic Neufeld of Aphria’s first quarter results. “Patient onboarding, harvest yields, delivering in-demand strains, kilograms sold and low production costs have again generated stellar top-line and bottom-line results. Completion of the part II expansion remains on schedule. Part III expansion just kicked off in the last two weeks. With expected annualized yields increasing to 18,000 kg upon completion of the expansions, Aphria is strategically positioned for continued sustainable growth.”

Brown says there are several reasons for Aphria’s early leadership role in the space. He notes that the company’s management team has decades of experience in the greenhouse and agricultural industries and that it has secured funding that is allowing for a major expansion. Importantly, he points out that Aphria is an industry leader in terms of low-cost production, an advantage the analyst thinks the company can actually widen in the months and years to come.

“Owing to its greenhouse-only approach, Aphria boasts one of the lowest per gram cash costs at $1.23/g (in vault) and an all-in production cost of $1.80/g (includes 1) packaging and 2) amortization related to production),” says Brown. “We estimate that over time Aphria’s all-in costs can be reduced to $1.00/g. Decreases in production costs are expected to come in stages: first, when the Part II expansion is completed and second, when the Part III expansion is completed and much of the production has become automated. Labour makes up the largest component of Aphria’s per gram production costs and management’s goal is to automate much of the labour intensive processes, and long-term, automate as much as feasibly possible. Furthermore, the company is capable of expanding and building production capacity at a much cheaper rate than its indoor peers.”

Brown thinks Aphria will post Adjusted EBITDA of $6.1-million on revenue of $23.3-million in fiscal 2017. He expects these numbers will improve to EBITDA of $11.9-million on a topline of $40.2-million the following year.

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