AltaCorp Capital analyst David M. Kideckel says that while a recent update and company plan from Canadian licensed producer Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News TSX:ACB) give a disappointing picture over the near term, the company’s renewed focus on financial discipline could be a good sign for the long haul within the growing cannabis market.
In an update to clients last Friday, Kideckel lowered his one-year price target for Aurora Cannabis from $5.00 to $2.80 while maintaining his “Sector Perform” rating.
Last week, Edmonton, Alberta-based Aurora announced that CEO Terry Booth would be retiring from his position, while at the same time, the company issued what it called “sweeping changes” intended to rationalize the company’s cost structure and balance sheet.
The transformation plan is said to involve a 10 per cent reduction in staff and amendments to its credit facilities, with the aim of the cost-cutting measures being to work towards achieving positive EBITDA by the first quarter of its fiscal 2021, which would be the quarter ending September 30, 2021.
Aurora also included preliminary numbers for its upcoming Q2 2020, calling for revenue between $62 and $66 million, less $12 million in returns and price reductions.
Management said that ACB will also take two write-downs in goodwill for between $740 and $775 million and between $190 million and $225 million for intangibles and PP&E.
Management has pointed to the slower rollout of retail across Canada as a prime factor in the lowered guidance, and Kideckel agrees that the cannabis headwinds play an important role.
“We believe that the regulatory outlook and the scarcity of distribution channels are impacting, and may continue to impact, Canadian cannabis companies’ financial results over the next several quarters. These headwinds which prevail industry-wide may endure over the near-term but we do not view them to hinder these companies’ long-term outlook, provided they take proactive steps to preserve their capital position and prepare themselves for the next phase of growth in the sector,” wrote Kideckel.
“In our view, the key bottleneck for growth in the Canadian cannabis sector is the country’s inadequate retail infrastructure. Based on the challenges consumers and businesses faced in Legalization 1.0, we believe regulators are taking proactive steps to improve the cannabis retail footprint in Canada, as we have already seen in Ontario. Given the gap between the current number and the potential number of stores in Canada, we believe that overcoming this bottleneck will unlock the sector’s growth potential. In
addition to an improvement in the Canadian regulatory environment, we view the launching of cannabis derivative products to drive meaningful growth and profitability across the sector,” he writes.
In that context, Kideckel says that Aurora’s business transformation plan should be viewed as a positive and if executed by management will leave the company well-positioned to benefit from the next growth phase in Canada’s cannabis sector.
At the same time, with the new update the analyst has reduced his forecasts to be in line with the company’s preliminary quarterly results and has increased his cost of capital to 12 per cent from 11 per cent to factor in higher uncertainty mainly stemming from a higher-than-expected cash burn over the near term.
“We remain cautious and factor positive EBITDA from FY2023e onwards. Over the near-term, we believe key catalysts for the stock may come from meaningful upside from the sale of cannabis derivatives and better visibility over Aurora’s profitability driven by management’s cost cutting measures,” Kideckel said.
The analyst is now calling for fiscal 2020 total revenue of $275 million (was $361 million) and adjusted gross profit of $143 million (was $202 million).
At press time, his $2.80 target represented a projected 12-month return of 26 per cent.