A new deal to acquire Reliva by Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News TSX:ACB) is getting the thumbs up from analyst David Kideckel of AltaCorp Capital.
Nonetheless, Kideckel issued an update to clients on Wednesday where he maintained his “Sector Perform” rating on the stock and one-year target of $10.40 per share, explaining that the financials of the acquisition target are as yet unclear.
Canadian pot company Aurora Cannabis is once again in the news, this time for the US$40-million purchase of US hemp-derived CBD company Reliva. Reliva has one of the highest market shares in the nascent US hemp and CBD business with products distributed to over 20,000 retail locations as well as an e-commerce presence.
The Massachusetts-based company also has distribution with eight of the top 20 US convenience store chains and is the only US CBD company with distribution with the three largest US wholesale distributors (McLane Company, Core-Mark and Eby-Brown).
“We have taken the time necessary to carefully assess the Company’s entry into the US market and we firmly believe that the combination with Reliva will create significant long-term value as Reliva provides us options to grow in hemp-derived CBD internationally,” said Michael Singer, Aurora executive chairman and interim CEO, in a press release on Wednesday.
Reliva CEO Miguel Martin, who will take up the position of president of Aurora USA, has 25 years experience in the CPG industry. According to Aurora, Reliva generated positive adjusted EBITDA over the last 12 months ended March 2020, with Aurora saying the transaction will become immediately accretive to ACB shareholders.
In his comments, Kideckel noted that Reliva has an asset-light business model, which fits well, according to the analyst, with Aurora’s focus on capital discipline. Reliva buys hemp from licensed industrial hemp farmers in Oregon and makes its products through a contract manufacturer in Florida.
“We view the transaction as highly positive. Reliva provides a platform for Aurora’s expansion into the US hemp-derived CBD market, which we believe has the potential to become a multi-billion dollar market over the next several years,” wrote Kideckel.
“Further, with Reliva’s three global wholesalers, this presents a tremendous opportunity for Aurora to potentially leverage this global network beyond the US. We believe the acquisition also strengthens Aurora’s management team, especially with the addition of US executives with significant experience in CPG and highly regulated industries,” Kideckel said.
The analyst thinks the near term is still cloudy for the still-evolving Canadian cannabis market, a state which has only been amplified by the COVID-19 crisis, and thus Kideckel is staying cautious on Aurora, saying, “We believe the acquisition of Reliva is positive for Aurora’s strategic positioning, but we lack clarity on Reliva’s financial performance, given it is a private company.”
Kideckel said as uncertainty surrounding COVID-19 dissipates and more clarity arises as to Reliva’s performance and growth potential, he will review his estimates on ACB. Until then, his forecast calls for fiscal 2020 revenue and adjusted EBITDA of $282 million and negative $202 million, respectively, and for fiscal 2021 revenue and adjusted EBITDA of $339 million and negative $13 million, respectively.
At press time, Kideckel’s $10.40 target represented a projected return of negative 41 per cent.