Aurora Cannabis keeps $15.00 target at GMP

Following the release of preliminary fourth quarter results, GMP Securities analyst Ryan Macdonell has maintained his “Buy” rating on Aurora Cannabis (Aurora Cannabis Stock Quote, News, Chart TSX:ACB).

On Tuesday, ACB released an update, previewing its Q4, 2019 results. The company said it expects revenue to fall between $100-million and $107-million, compared to the $19.1-million topline the company posted in the same period last year. Management added that the company is tracking towards positive Adjusted EBITDA.

“Our Q4 2019 guidance highlights Aurora’s continued leadership,” CEO Terry Booth said. “We set out to be best-in-class cultivators, and through carefully evaluated acquisitions, that vision continues to drive exceptional results today. We are the leader in cultivation capacity, production available for sale and revenues for cannabis in the Canadian medical and consumer markets. We continue to lead the buildout of European and other international medical cannabis markets. Our success to date comes from a focus on quality, regulatory compliance, appropriate board of directors oversight, and delivering a profitable, low-risk and sustainable business for our shareholders.”

Macdonell notes that the midway point of the revenue expectations is $103.5-million, which is below the street consensus of $112-million and well below his previous forecast of $132-million. He says the culprit is likely harvest that occurred too late to be processed and sold in the quarter and also that the company may be deciding to build inventory for extract products.

GMP: Aurora Cannabis may have just posted the highest quarterly cannabis revenue reported by any LP…

But on the bright side, the analyst says $92.5-million (the midway point of the company’s own estimate) would be the highest quarterly cannabis revenue reported by any LP.

“In our view, this demonstrates that ACB has been ramping up production meaningfully throughout 2019 and that the increased product availability has been met with strong demand from consumers and subsequent orders from provincial distributors,” he said.

In a research update to clients today, Macdonell maintained his “Buy” rating and one-year price target of $15.00 on Aurora Cannabis, implying a return of 65.7 per cent at the time of publication.

The analyst thinks ACB will post EBITDA of negative $132.0-million on revenue of $254.1-million in fiscal 2019. He expects those numbers will improve to EBITDA of positive $103.5-million on a topline of $630.8-million the following year.

Investors take the news in stride…

Macdonell notes that investors brushed off yesterday’s update and says this is the appropriate response in the face of the company’s “solid execution”.

“While the Q4 pre-announcement was below consensus expectations, ACB shares were still up ~8% on the day,” the analyst writes. “In our view, this is because the sales growth previously expected in Q4 could be pushed into Q1 as we expect harvesting and processing time were a factor in the quarter. Furthermore, the midpoint of ACB’s guidance calls for strong QoQ growth of ~58% in cannabis revenue, demonstrating solid execution on the company’s strategy. Our target is based on a DCF assuming: (1) a 7.5% discount rate, (2) average share of the domestic recreational market of 21%, (3) an EBITDA margin of 36%, and (4) a 3.2% terminal growth rate.”