Take a pass on Aurora Cannabis, GMP Securities says

Aurora Cannabis (TSX:ACB) held an investor day at its Aurora Sky facility at the Edmonton International Airport this week, where GMP Securities analyst Martin Landry came away from the event impressed by the licensed producer’s earnings power.

In a research update to clients on Thursday, Landry reiterated his “Hold” recommendation on Aurora with a target price raise to $9.00 (from $8.00).

On Wednesday, Aurora announced a joint partnership with pre-roll technology company Wagner Dimas as well as a partnership agreement with cosmetics company Evio Beauty Group regarding CBD-infused products.

Those deals followed on the heels of last week’s announcements that the advisory firms ISS and Glass Lewis have recommended that Aurora shareholders vote in favour of the MedReleaf acquisition and that the deal had been cleared by Canada’s Competition Bureau. Throw in supply agreements locked up with the provinces of Alberta and BC and a sales license given to Aurora Vie, the company’s production facility in Pointe-Claire, Quebec, and you’ve got a busy couple of weeks for Aurora.

But Landry’s main comment concerned the vast scale and high levels of automation featured at Aurora Sky, which management says will be producing dried cannabis on cash costs nearing $0.50 per gram, enough to generate big profits for ACB, says the analyst.

“We come away from our visit impressed by the potential earnings power of the Sky facility,” says Landry. “Assuming the total production is sold, the facility could generate in excess of $200m million in EBITDA when edible products become available. This is a significant earnings power which could be replicated at the [Aurora Sun] facility.”

“Based on the above, we increase our long-term margin profile for Aurora,” he says. “Our target is based on a DCF assuming: (1) a 8.5 per cent discount rate; (2) avg. market share of 22 per cent; and (3) EBITDA margins of 35 per cent (31 per cent previously).”

Landry thinks that ACB will produce EBITDA of negative $20.8 million on revenue of $59.1 million in 2018 and EBITDA of $120.4 million on a topline of $476.0 million in 2019.

His $9.00 target represents a projected return of negative 0.3 per cent at the time of publication.