Following a corporate update from Edmonton-based licensed producer Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News TSX:ACB), PI Financial analyst Jason Zandberg issued a report to clients on Friday in which he changed his rating from “Buy” to “Neutral” and his price target from $6.00 to $2.00 per share.
Aurora on Thursday announced the retirement of founder and CEO Terry Booth, with executive chairman Michael Singer appointed as interim CEO effective immediately.
At the same time, the company announced a “transformation plan” aimed at reduce Aurora’s expenses, one which will involve the layoff of 500 employees including 25 per cent of its corporate positions.
The company also had its credit facilities amended to ease covenant burdens, effectively reducing ACB’s credit facility by $141.5 million to $218.5 million.
Aurora is expected to report its second quarter fiscal 2020 results on February 13 but gave a preview, saying that revenue will come in between $62 and $66 million, less $12 million in returns and price reductions, along with two write-downs of $740 million to $775 million for goodwill and $190 million to $225 million for intangibles and PP&E.
The company said its cash position at the quarter’s end was $156 million with $45 million in restricted cash.
CFO Glen Ibbott said in the press release that the assets being impaired are with Aurora’s operations in South America and Denmark and not related to the company’s core Canadian assets.
“We believe that the long-term opportunity for Aurora remains very compelling, despite a slower than anticipated rate of industry growth in the near-term. We also believe our approach to rationalizing the business and conservatively improving our balance sheet positions Aurora in a more stable position for sustainable growth going forward,” said Ibbott.
In his report, Zandberg called the impact of the event a negative for the stock and company, saying the announcements were unexpected.
“[The announcements] paint a picture of a company in financial difficulty. ACB’s creditors have given them two quarters of leeway before the EBITDA covenant kicks in which may be difficult given the current upheaval,” wrote Zandberg.
The analyst has changed his forecast to $51.0 million in revenue for the second quarter and $66.8 million for the third quarter, with a modest improvement to $81.9 million for Aurora’s Q4. Looking further ahead, Zandberg has dropped his fiscal 2021 revenue estimate from $857.4 million to $481.0 million.
“The reason for the decline is not a reflection of our pessimism for the Canadian cannabis space but is our lack of confidence in ACB’s ability to capture the demand on an extreme budget,” he wrote. “Our outlook would change considerably if the company can obtain significant financing without significant dilution – a huge task.”
Zandberg’s target represents a P/Sales multiple of 5x based on his fiscal 2020 estimates and at press time amounted to a projected 12-month return of negative 12 per cent.
Aurora’s share price finished 2019 down 59 per cent, while year to date in 2020 the stock is now down 21 per cent.