Aurora Cannabis is still a leader in the pot sector, PI says

PI Financial analyst Jason Zandberg finds some positive elements to the latest quarterly results from Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News TSX:ACB) yet a dimmer view of earnings going forward are cause for a price target drop in the analyst’s quarter review on Friday.

Aurora Cannabis dropped lower in early-day trading on Monday as investors continue to pummel the stock after last week’s earnings report.

Edmonton-based licensed producer Aurora announced its first quarter fiscal 2020 financials last Thursday, showing revenue falling 25 per cent from the previous quarter to $75.2 million and EBITDA dropping to a loss of $39.7 million compared to a loss of $11.7 million during the previous quarter.

In the quarterly press release, CEO Terry Booth pointed to short-term distribution and regulatory headwinds in the Canadian market while nonetheless staying optimistic about the industry’s long-term prospects. Booth said the company is taking steps to strengthen its balance sheet, including a plan to settle its 5.0 per cent convertible debentures due in March 2020, a reduction in capital investments and securing funds through an at-the-market capital raise.

“Aurora has, and will continue to focus on everything in our control,” said Booth. “Our success in doing this was demonstrated again this quarter by continued strong improvement in our core KPIs. We delivered solid operating results this quarter, exemplified by our industry-leading cash cost to produce which declined another 25 per cent to $0.85 per gram this quarter, as well as by our industry-leading gross margins and market share.”

The $75.2-million top line and EBITDA of negative $39.7-million were below Zandberg’s expectations of $99.1 million and negative $22.6 million, respectively. Drilling down, the analyst pointed to rec cannabis sales which were down 33 per cent from the previous quarter to $30.0 million, Canadian medical sales which were up one per cent to $25.5 million and international medical sales which were up 11 per cent to $5.0 million.

On the plus side, Zandberg noted that while ACB missed expectations, the quarter did not involve product return issues or write-downs, both features of recent quarters for other major Canadian LPs.

The analyst also liked seeing more capital and capex clarity from Aurora, referring to the revised terms for its convertible debenture, which reduce ACB’s cash requirement for the next year, and the revised build-out schedule, which involves suspending construction at both Aurora Nordic in Denmark and Aurora Sun in Medicine Hat, Alberta.

“Management would not commit to future revenue or EBITDA guidance but were optimistic about the launch of cannabis 2.0 and its planned product offerings,” wrote Zandberg. “Our revenue estimates for FY20 and FY21 are $350.7 million and $857.4 million (previously $600.0 million and $1,092 million), respectively. Our EBITDA estimates for FY20 and FY21 are ($93.8 million) and $144.0 million (previously $8.8 million and $303.7 million), respectively.”

On valuation, Zandberg says, “We believe ACB will maintain its leadership position in the Canadian market and deserves a premium trading multiple.”

The analyst is maintaining his “Buy” rating while decreasing his target from $7.00 to $6.00, which represented a projected return of 49.6 per cent at the time of publication.