Aurora Cannabis’s oil strategy gets thumbs up at Canaccord Genuity

A deal that will see Aurora Cannabis (TSX:ACB) partner to produce cannabis oils is being seen as an important development by Canaccord Genuity analyst Neil Maruoka.

This morning, Aurora announced a five-year deal with Radient Technologies that will see the pair share technologies related to standardized cannabis extracts.

“This agreement will enable us, in the very near future, to dramatically accelerate the production of high-margin cannabis derivatives under favourable terms,” said CEO Terry Booth. “The market for non-smoked derivative cannabis products is growing at a remarkable pace, and through this agreement we have a cost-effective and scalable means to help meet this demand — particularly once we begin harvests in the first half of 2018 at our 100,000-plus-kilogram-per-annum Aurora Sky production facility. We intend to continue our collaboration with Radient on other R&D projects that we expect will deliver significant value to both companies.”

Maruoka says this is a move that has offensive and defensive aspects.

“We believe a robust cannabis oil strategy is important for LPs to maintain and grow operating margins in the longer term, especially as cannabis potentially becomes commoditized with a shift to a wholesaler model,” the analyst says. “Although we are uncertain of the manufacturing efficiencies from Radient’s extraction technology, we nonetheless expect that increased extract yields will be imperative for Aurora once production from its 100,000 kg Aurora Sky facility comes on line. Under the agreement, Aurora will supply Radient with materials (cannabis or hemp) for processing into oils once Radient receives Health Canada licensing. The term of the deal is for five years, with the option for Aurora to expand the agreement for an additional five years; Aurora also has the option to expand its ownership in Radient up to 19.99% (from 9.6% currently).

In a research update to clients today, Maruoka maintained his “Speculative Buy” rating and one-year price target of $3.65 on Aurora Cannabis, implying a return of 16.2 per cent at the time of publication.

Maruoka thinks Aurora will generate EBITDA of negative $3.7-million on revenue of $18.0-million in fiscal 2017. He expects those numbers will improve to EBITDA of positive $34.6-million on a topline of $71.0-million the following year.