Aurora Cannabis is facing challenges, GMP Securities says

Third quarter results that fell below his expectations have GMP Securities analyst Martin Landry cutting his price target on Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News: TSX:ACB).

On Tuesday, Aurora reported its Q3, 2018 results. The company lost $20.79-million on revenue of $16.1-million, a topline that was up 211 per cent over the same period last year.

“More than tripling our revenues year over year demonstrates that Aurora continues to execute consistently on its growth strategy, with exceptional performance across all functions, both in Canada and internationally,” CEO Terry Booth said. “It’s worth noting that Aurora’s industry-leading revenue growth since starting commercial operations has thus far been driven predominantly by the output of a single production facility, Aurora Mountain, supported by differentiation into additional revenue streams. With production under way at Aurora Vie and Aurora Sky, yield enhancements being implemented at CanniMed, and significant new capacity coming on line through 2018, we are targeting further, accelerated growth in subsequent quarters. We also continue to prepare for legalization of the adult consumer use market, as our unique investment in Liquor Stores, growing inventory and our supply deal with Quebec are testament to. We have consistently executed at an exceptionally high pace, investing in facilities, as well as in vertical and horizontal diversification. This has created a strong platform for continued growth, and we look forward to reporting on our progress in the coming quarters.”

Landry says ACB’s topline fell short of his expectation of $20.0-million, mostly because of lower than expected cannabis sales volumes. And the analyst say the company’s EBITDA loss of $6.1-million fell “substantially below” the positive $600,000 in EBITDA he had modeled.

In a research update to clients today, Landry maintained his “Hold” rating on Aurora Cannabis, but lowered his one-year price target from $11.00 to $7.50, implying a return of negative 3.6 per cent at the time of publication. The analyst explained his reasoning.

“Aurora may have challenges in gaining a significant market at the onset of the recreational market due to delays in getting its sales licences at Aurora Sky, Aurora Vie and Lachute,” the analyst says. “Given the rich valuation of 28x forward EBITDA, a premium of 60% to peers, we advise investors to stay on the sidelines and await a better entry point. Our target price decreases mainly due to our lower forecasts. Our target is based on a DCF assuming: (1) a 8.5% discount rate, (2) avg. market share of 11%, and (3) terminal growth rate of 3%.”

Landry’s revised forecast has ACB generating EBITDA of negative $20.8-million on revenue of $59.1-million in fiscal 2018. In fiscal 2019, the analyst thinks the company will post EBITDA of positive $77.7-million on a topline of $268.3-million.