ATB Capital raises price target on Aurora Cannabis

ATB Capital Markets analyst David Kideckel likes the new path being charted by Canadian cannabis LP Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News TSX:ACB).

In an update to clients Tuesday, Kideckel upped his target price on ACB from $10.40 to $11.30 while
maintaining his “Sector Perform” rating.

Edmonton-headquartered Aurora Cannabis delivered a business update and preliminary Q4 numbers on Tuesday, while at the same time announcing the appointment of new CEO Miguel Martin, previously CEO of Reliva, which Aurora acquired in July 2020.

Earlier this year, Aurora brought forth a business transformation plan aimed at directing the company toward greater fiscal responsibility and, ultimately, profitability via cost reduction measures and a renewed focus on capital allocation.

“Under Aurora's new CEO, the team expects to be focused on executing a tactical plan intended to: (1) grow Aurora's leading market share in key profitable Canadian consumer categories; (2) protect and enhance Aurora's leading market share in Canadian medical; (3) grow our international medical business; and (4) build leading brands under Reliva in the US CBD market. Ultimately, Aurora believes that it is capable of supporting significantly higher levels of net revenue in the future without a corresponding level of growth in SG&A,” the press release said.

On the preliminary quarterly numbers, Aurora is calling for net revenue of between $70 and $72 million and adjusted gross profit of between $32 and $36 million. Aurora anticipates impairment charges on fixed assets ($90 million), inventory ($140 million), and goodwill/intangibles ($1.6-$1.8 billion).

Kideckel said that while the company still has a long way to go in its transformation plan, he’s taking Aurora’s announcement as a positive. On the Q4, Kideckel had been estimating net revenue of $75.3 million (consensus $77.0 million) and adjusted gross profit of $32.3 million (consensus $36.3 million).

The analyst said putting in Martin as the new CEO indicates a shift by Aurora to a more CPG-focused strategy, as his experience lies in regulated industries, CPG and the US CBD market. Kideckel said if executed well, the shift would be a positive for Aurora as it would lead to more resilient margins and prudent capital allocation.

“Based on our conversations with management and sales data from other Canadian LPs, we believe that Aurora may have lagged its competitors in some product categories (e.g. vapes (here) and pre- rolls) which are poised to represent a material share of the Canadian recreational cannabis market. In our view, over the near-term, the Company has significant opportunities to increase its presence and work on these product categories to drive sales growth, as outlined in the first point of the Company’s tactical plan,” Kideckel wrote.

“We have reduced our revenue and increased our gross margin estimates in light of Aurora’s preliminary results. Given the Company’s cost-cutting measures executed to date, we have increased our adj. EBITDA estimates, which more than offset our top-line estimate reduction and drives the increase in our price target,” Kideckel wrote.

The analyst is now calling for Aurora to generate fiscal 2020 revenue and adjusted EBITDA of $278 million and negative $201 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $315 million and negative $13 million, respectively.

Kideckel’s new target of $11.30 per share represented at the time of publication a projected one-year return of eight per cent.