Tilray (TLRY) Gets a Two-Notch Upgrade to 'Buy' at Jefferies as Aphria Merger is Seen as a 'Perfect Match'

Jefferies analyst Owen Bennett delivered a two-notch upgrade on Tilray (NASDAQ: TLRY) from “Underperform” to “Buy” after describing the recent merger with Aphria as a “perfect match.” Bennett also raised his price target to $23 from $4.77.

On the merger, Bennett writes:

“We see pro-forma FY21-FY24 combined Tilray sales growing at 33% to leave FY24 sales at $1.7bn vs. avg.major Canadian LP's of $582mn and major US MSO's of $1.6bn. We upgrade to Buy, with a new SOP DCF driven PT of $23. Our PT implies a NTM EV/Sales of 13.2x; more than justified for us as compares similarly to closest Canadian peers of Canopy and Cronos, despite having a stronger sales/profit growth profile, a more attractive positioning to capture an EU upside, and equally compelling optionality for US THC. Further, combined Tilray's growth outlook is such that by 2024 our PT EV/Sales should come in to 5.9x.”

A new company is now a clear leader in the Canadian market, writes Bennett in a memo sent to clients.

“An equally strong combined company 2.0 portfolio (vapes, edibles, bevs) should see further gains; we model c19% by 2025. With Canadian industry trends to now also see strong improvement (early headwinds behind us) we see the Tilray Canadian sales moving to $723mn in FY25 vs. $448mn in FY22.”

As for the industry, Tilray should also place a high focus on penetrating the EU market where, according to the analyst, 3 things will be critical:

1) You need to be a leading player in Germany (over 70% of EU sales);

2) Especially with competition intensifying, and the fact much of the future market may be as an API into Pharma, you need sizeable scale so that you can offer the lowest prices;

3) Given longer term, the medical segment will become more pharma like, you need relationships with Pharma (Tilray/Novartis), and need to be doing work around clinical trials.

In this context, a combined Tilray “ticks all these boxes and is perfectly equipped to succeed,” according to Bennett. The US participation in the global market is “increasingly possible sooner vs later (early 2022),” which should prompt the company to “capture possible value creation from such a move.”

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