There are some positives to Aurora Cannabis’ (Aurora Cannabis Stock Quote, Chart, News TSX:ACB) new business strategy but the company is still a wait-and-see prospect, according to ATB Capital Markets analyst David Kideckel.
In an update to clients on Wednesday, Kideckel reviewed Aurora’s latest quarterly results and maintained his “Sector Perform” rating.
Shares of ACB fell sharply on Wednesday as the Edmonton-based licensed producer announced on Tuesday after market close its fiscal fourth quarter 2020 financials for the period ended June 30, 2020.
The results, which were preceded by preliminary quarterly numbers delivered on September 8, featured net revenue of $72.1 million versus $75.5 million for the previous quarter and an adjusted EBITDA loss of $34.6 million versus a loss of $50.4 million for the third quarter 2020. Aurora saw its SG&A expenses drop from $78.9 million in the Q3 to $67.7 million and the company’s capex came in at $16.4 million versus $73.7 million in the third quarter. Subsequent to the Q4, ACB raised US$36.6 million through its at-the-market facility, with US$183 million now remaining available. (All figures in Canadian dollars except where noted otherwise.)
On the quarter and the company’s direction, new CEO Miguel Martin said he wants to expand Aurora beyond flower to concentrates and edibles.
“As reported in our September 8, 2020 business update, our Q4 demonstrated progress in rationalization of SG&A and cash burn along with continued leadership in both Canadian and international medical. However, Aurora has slipped from its top position in Canadian consumer, a market that continues to support material growth and opportunity,” said Martin in a press release. “My focus is therefore to re-position the Canadian consumer business immediately. We look to expand beyond the value flower segment, leverage our capabilities in science and product innovation and put our effort on a finite number of emerging growth formats. This entails prioritizing our San Rafael, Aurora and Whistler premium brands in flower, pre-rolls and vapour, which will be shortly followed by strategic marketing and innovation efforts in concentrates and edibles,” he said.
Kideckel said the quarterly numbers came in roughly in-line with expectations and with the company’s preliminary results, although the $34.6-million EBITDA loss was a miss compared to his estimated loss of $14.6 million and the consensus loss of $27.6 million. Kideckel noted that despite a drop in average selling price, ACB managed to increase its adjusted gross margin for its consumer cannabis segment from 29 per cent in Q3 to 35 per cent in Q5, with the analyst saying,
“We believe this demonstrates the Company’s low-cost advantages related to its scale and operational efficiency, which can be further strengthened by its recent cost-cutting measures and asset rationalization,” Kideckel wrote.
Kideckel said Aurora’s drive to profitability (planned for Q2 of its fiscal 2021) along with the appointment of Martin are leading the company to a more CPG-focused approach, including now a good-better-best tactic to profitability and margins rather than a singular focus on gaining market share.
“Taking a page from the CPG sector, a G-B-B approach entails creating price bundles and product features to attract specific and profitable niches of the market. With this strategy, we believe that Aurora will be making focused and executional bets going forward, as opposed to trying to serve all market segments regardless of profitability,” Kideckel wrote.
“While ACB’s new strategy is encouraging, considering that the Company has lost market share in the Canadian recreational segment over the last few months, we remain on the sidelines pending management’s execution to move to a more constructive stance on the stock,” Kideckel said.
Along with his “Sector Perform” rating, Kideckel has reduced his target price from $11.30 to $10.25 per share, which at press time represented a projected return of five per cent.