Aurora Cannabis’s cost-cutting is encouraging, says AltaCorp

AltaCorp Capital analyst David Kideckel says he’s encouraged by recent developments from Canadian LP Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News TSX:ACB) but they’re not enough to move the needle.

Kideckel issued an update to clients on ACB on Wednesday where he left unchanged his “Sector Perform” rating and $10.40 target price, which at press time reflected a projected 12-month return of negative 43 per cent.

Edmonton-headquartered Aurora Cannabis continued its downsizing efforts with an announcement on Tuesday of an immediate reduction in its SG&A workforce by 25 per cent along with 30 per cent of production staff to be laid off over the next half-year.

Operations have been shelved, too, with Aurora planning to close some of its operations at five different facilities, one in Alberta, one in Saskatchewan, one in Ontario and two in Quebec, also over the next half-year.

This is the second round of cuts coming after Aurora’s Business Transformation Plan, complete with a corporate change at the top, was first announced in February in attempt to right the ship on one of Canada’s largest cannabis companies.

“This has not simply been a cost cutting exercise,” said executive chairman and interim CEO Michael Singer, in a press release on Tuesday. “We have undertaken a strategic realignment of our operations to protect Aurora’s position as a leader in key global cannabinoid markets, most notably Canada.”

“Both the Canadian facility rationalization and inventory revaluation are expected to improve gross margins and accelerate our ability to generate positive cash flow. We believe that we now have the right balance for the long-term success of Aurora – market leadership, financial discipline, operational excellence, and strong execution. We remain focused on making Aurora a profitable and robust global cannabinoid company,” Singer added.

Kideckel called the cut to Aurora’s SG&A staff a “seismic reduction” from management, with ACB having now achieved its objective of a $40 to $45-million SG&A run-rate, which speaks to management’s credibility, the analyst said.

“We view this corporate announcement as positive, demonstrating that management is walking the walk by executing against its targets with bold cost-cutting measures and realigning the Company’s operations to improve profitability, thus preserving the Company’s liquidity and positioning Aurora for long-term growth,” Kideckel wrote.

Kideckel said the company’s facility consolidation efforts could also drive long-term operational efficiencies and higher gross margins due to economies of scale, while the company’s latest quarterly results (fiscal Q3 2020) showed market share gain and positive sales results from ACB’s value brand and cannabis derivative products.

Additionally, Kideckel wrote of Aurora’s acquisition of Reliva (announced on May 20, 2020) that it should strengthen ACB’s management team and give the company a “tremendous opportunity” to explore the US CBD market and leverage the company’s global network beyond the United States.

At the same time, the analyst said near-term uncertainties in the Canadian cannabis market are an issue, coming from increased competition, product oversupply and the COVID-19 crisis.

“While we believe that this environment, beyond management’s control, may impact Aurora’s efforts to profitability, the Company is advancing considerably on its business transformation plan to date. We look forward to seeing Aurora continue to advance on its strategic priorities, as the Company has been doing so during the last couple of quarters,” the analyst added.