Aurora Cannabis has a 37 per cent upside, Canaccord Genuity says

In an estimates revision ahead of Aurora Cannabis’ (Aurora Cannabis Stock Quote, Chart, News: TSX:ACB) quarterly financials later this week, Canaccord Genuity analyst Neil Maruoka says elevated costs and operating expenses arising from the company’s expansion plans are likely to eat into its earnings both this year and the next. But those short term issues aren’t impacting Maruoka valuation of ACB, which rates the stock a “Speculative Buy” with a one-year price target of $11.00, both unchanged.

Operating out of its Cremona, Alberta, facility, licensed producer Aurora Cannabis is currently constructing new marijuana growing operations outside of Edmonton, Alberta, (Aurora Sky) as well as at a recently announced facility in Medicine Hat, Alberta (Aurora Sun).

For the company’s Q3/FY18, Maruoka forecasts revenue of $16.3 million, a 40 per cent increase from the previous quarter, as well as EBITDA of $0.7 million and EPS of ($0.00).

The analyst has increased his estimated operational expenditures as a result of the acquisition of CanniMed Therapeutics, completed earlier this month, which in effect lowers his 2018 adj. EBITDA estimate from $20.8 million to $3.5 million, along with lowering his 2019 adj. EBITDA from $134.2 million to $124.1 million. Maruoka’s revenue estimates are $70 million for 2018 (revised from $69 million) and $336 million for 2019 (unchanged).

“With Aurora Sky slowly ramping operations and the integration of the recent CanniMed acquisition, we believe the company’s operational costs will remain at an elevated level. As a result, we have increased our G&A and sales and marketing assumptions for Q3, resulting in a lowered adjusted EBITDA estimate of $0.7 million for the quarter,” says the analyst.

“We believe Aurora is positioned to be a leading cannabis producer in Canada. We would remain buyers of the stock ahead of construction milestones for Aurora Sky (as well as Aurora Sun) and the potential for a German production license in 2018,” he says.

Maruoka says ACB trades at 20.0x his two-year forward EBITDA forecast, which compares to its peer group average of 17.2x and to the highest market cap Canopy Growth Corp’s (TSX:WEED) 23.8x.

The $11.00 target price represents a projected return of 37 per cent at the time of publication.