Aphria Inc’s (Aphria Stock Quote, Chart, News: TSX:APH) third quarter fiscal 2018 results beat expectations, with an 81 per cent uptick in adjusted EBITDA, but regulatory delays in both Canada and Germany are cause for analyst Martin Landry of GMP Securities to lower his estimates for FY18 and FY19. In a research note to clients on Tuesday, Landry maintained his “Buy” recommendation with a target price reduction to $20.00 for APH.

Cannabis licensed producer Aphria reported its Q3FY18 results on Monday, posting net income of $13.0 million and adjusted EBITDA of $2.9 million, which came in higher than both the consensus of $2.4 million and Landry’s estimate of $2.0 million.

“We had another incredible quarter, with year-over-year revenue having more than doubled, cash costs back under $1, and our 10th consecutive quarter of positive adjusted EBITDA,” said Vic Neufeld, CEO of Aphria, in a press release. “After the end of the quarter, we brought additional production capacity online with our Part III expansion at Aphria One and established a worldwide presence through our acquisition of Nuuvera. We continue to hold a strong cash position that will give us the flexibility to peruse attractive investment opportunities both domestically and around the world.”

Neufeld said that the company’s immediate plans are to keep on with its preparations for the Canadian rec cannabis market while continuing to develop its medical marijuana product mix and patient base.

The company plans on rolling out its branding for recreational adult-use cannabis products later this week, while on the medical cannabis side, product lines are in development for soft gels and an oral spray.

Landry expects Aphria to take up 12.5 per cent of the market once recreational marijuana is legalized in Canada and he says he’s positive about Aphria’s ability to produce healthy profit margins once rec sales commence.

“With production costs expected to decrease below $1.00/g at full scale Aphria’s profitability profile looks impressive, with the potential to generate substantial gross profit margins,” says the analyst. “Hence, recreational sales should boost the company’s profitability substantially, with our newly introduced FY20 estimates calling for EBITDA of ~$175 million, suggesting a forward valuation of 14x.”

“APH’s shares are currently trading at ~18x CY19 EV/EBITDA, in line with a broader peer group of senior licensed producers,” he says. “This is despite APH’s attractive positioning in both domestic and international markets, and the company’s expansion plan which should solidify APH as one of the three largest licensed producers in the industry, both of which argue for a premium valuation for APH. Hence with shares trading in line with peers, we consider APH’s valuation as being relatively attractive currently.”

The analyst has revised his estimates to reflect delays in the German domestic tender process and a later date (October 1 estimate) for the Canadian rec market to begin. Landry predicts Aphria will produce revenues and EBITDA in FY18 of $35.3 million and $8.3 million, respectively, and revenues and EBITDA in FY20 of $223.5 million and $74.0 million, respectively. The analyst has introduced FY20 forecasts for Aphria, estimating revenues of $439.5 million and EBITDA of $174.1 million.

Landry’s $20.00 target price (down from $25.00) represents a projected return of 63.4 per cent at the time of publication.