Aurora Cannabis downgraded to “HOLD” at GMP following CanniMed bid

A bid from Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News: TSX:ACB) to acquire CanniMed Therapeutics has GMP analyst Martin Landry raising his price target on the former but lowering his rating on the stock.

On Tuesday, Aurora Cannabis announced an all-share proposal to acquire peer CanniMed Therapeutics for $24.00 a share.

“Aurora and CanniMed are a great fit, truly complementary, and I am convinced we can generate even greater value by combining the two companies and aligning our efforts strategically,” said Aurora CEO Terry Booth. “Aurora has the management expertise, capital markets strength, distribution channels, brand power and growth prospects to successfully integrate CanniMed into Aurora — the fastest-growing cannabis company with the sector’s most exceptional execution track record.”

Landry describes the bid for CanniMed as “opportunistic”.

“Aurora’s offer would value Cannimed at $510m on a net cash and net debt basis,” the analyst explains. “The valuation multiple would represent 16.7x FY19 EBITDA using consensus FY19 EBITDA estimate of $30.5m. This valuation multiple is roughly in line with senior licensed producers and reflect the valuation discount investors were applying to CanniMed. The transaction is opportunistic given that Aurora’s shares are at an all-time high having more than doubled in value in the last month.”

But the analyst thinks Aurora Cannabis, which rose from $2.47 on August 18 to a close of $6.41 on November 14, is looking fully valued.

“We are changing our rating on ACB to a HOLD solely based on valuation. While we like Aurora’s growth prospects, its strong balance sheet and its competitive positioning, we feel these are already reflected in the company’s share price. Our target increases based on valuation expansions in the sector and is based on a DCF assuming: (1) an 8.5% discount rate (9% previously), (2) avg. market share of 9% and EBITDA margin of 29%, and (3) terminal growth rate of 3%.”

In a research update to clients today, Landry raised his one-year price target on Aurora Cannabis from $4.50 to $5.00, implying a return of negative 22.0 per cent. But the analyst lowered his rating on the stock from “BUY” to “HOLD”.

Landry thinks Aurora Cannabis will generate EBITDA of $13.4-million on revenue of $72.7-million in fiscal 2018. He expects those numbers will improve to EBITDA of $88.8-million on a topline of $257.8-million the following year.