Aurora Cannabis has no upside, GMP Securities says

The acquisition of ICC Labs will significantly expand its presence in Latin America, but GMP Securities analyst Martin Landry sees little reason to own Aurora Cannabis (Aurora Cannabis stock Quote, Chart TSX:ACB) at current prices.

On Monday, Aurora Cannabis announced it would acquire ICC Labs for $1.95 a share.

“ICC is an ideal partner for Aurora to establish leadership in the South American cannabis market, delivering clear first mover advantage on a continent with over 420 million people,” Aurora CEO Terry Booth said. “ICC and its management team have shown exceptional vision and execution across production, expansion, distribution and product development. The company has a very strong management team with deep connections throughout the continent, which we believe will facilitate successful expansion into all South American markets.”

Landry says this deal is proposed to be done at a reasonable transaction multiple and says there is a real benefit to adding Latin American production as the climate and labour costs combine to make the area particularly appealing for marijuana production. Still, the analyst thinks the upside of deal is currently baked into ACB’s stock price.

In a research update to clients Tuesday, Landry maintained his “Hold” rating and one-year price target of $9.00 on Aurora Cannabis, implying a return of nine per cent at the time of publication.

Aurora Cannabis stock is more or less fully valued, Landry says

“ICC is a leading player in Latin America and will make a solid addition to Aurora’s business, allowing it to expand into this large potential market,” Landry says. “Given the transaction has support from ICC’s Board and its largest shareholder, Union Group with 29% of the shares outstanding, we are assuming that the deal will close. Thus, we have incorporated ICC’s expected results into our forecasts, however, the dilution from the share issuance leads to no change in our target. Our target is based on a DCF assuming: (1) an 8.5% discount rate, (2) avg. market share of 22%, and (3) EBITDA margins of 35%.

Landry thinks ACB will generate EBITDA of negative $20.8-million on revenue of $59.1-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $126-million on a topline of $488.5-million the following year.