Beware the Aurora Cannabis rally, AltaCorp says

Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News TSX:ACB) produced mixed results in its latest earnings report, according to AltaCorp Capital analyst David Kideckel, who reviewed the numbers in an update to clients Friday.

Kideckel decided to stick with his “Sector Perform” rating on the stock while changing his target price from $2.50 to $10.40 per share.

Edmonton-based Aurora Cannabis released its fiscal third quarter 2020 results last Thursday, showing total revenue of $75.5 million, above the consensus $66.7 million and Kideckel’s $65.1 million, with an adjusted EBITDA loss of $50.8 million, compared to the consensus average at $40.0 million and Kideckel’s expected loss of $50.8 million.

Aurora management called the quarterly numbers in line with their expectations, saying the company is firmly on track with its cost-savings and capex goals laid out in February.

“Since announcing the Business Transformation Plan on February 6, 2020, Aurora has taken a number of concrete steps which place Aurora firmly on track to meet or exceed previously announced targets. These steps are designed to strengthen Aurora’s balance sheet and reduce go-forward costs, as the Company works to achieve profitability and positive cash flow,” said Michael Singer, executive chairman and interim CEO.

On those measures, Aurora had $75.1 million in SG&A costs in its third quarter, down $24.7 million from the previous quarter and on track with the company’s target of $40 to $45 million, according to management. On profitability, Aurora is aiming at fiscal Q1 of 2021 as its goal.

Aurora’s share price has been on a downward trend for about a year now, with a noticeable spike over the last couple of trading days. The company initiated a 12:1 share consolidation effective on May 11.

By the end of its fiscal third, Aurora had a cash position of $230.2 million, with a quarterly cash burn rate of $154.6 million (down 43 per cent from the previous quarter), while the company also raised $22.0 million from debt and $206.5 million from an at-the-market financing.

For positives, in his report, Kideckel said Aurora is regaining market share with its value brand and derivatives products, selling 12,729 kg of cannabis over the third quarter, a 34 per cent increase sequentially.

The analyst said the COVID-19 crisis has so far not materially impacted Aurora’s facilities which remain operational, yet at the same time, he noted there is likely to be a pandemic-related hit on Aurora’s near-term growth, leading to a reduction in his forecast.

Kideckel is calling 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.

“We view significant near-term uncertainty in the Canadian cannabis market, intensified by the COVID-19 crisis,” Kideckel wrote. “We believe this environment, which is beyond management’s control, may thwart Aurora’s efforts to profitability. As such, we maintain our neutral stance on the stock.”

At press time, Kideckel’s $10.40 target represented a projected return of 13 per cent and is now approximately half of its Tuesday closing price of $20.40.