Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News TSX:ACB) received a rating raise from analyst David Kideckel of ATB Capital Markets on Monday, with the boost from “Underperform” to “Sector Perform” coming due to the pullback in share price of late and renewed strength in the company’s balance sheet. In an update to clients, Kideckel kept his estimates and price target as is, projecting a one-year target of $10.50, which at press time represented a return of 15 per cent.
Edmonton-based licensed cannabis producer Aurora announced on Monday the closing of a previously announced overnight marketed public offering of 23 million units at US$7.50 per for total proceeds of US$172.5 million. Each unit involves one common share and one-half warrant with an exercise price of US$9.00, expiring in 40 months. Aurora said the funds would go towards growth opportunities, working capital and general corporate purposes.
Following the raise, Kideckel estimated ACB’s cash position at about $476 million, a strong position, according to the analyst, and one which gives the company advantages in the current cannabis market. (All figures in Canadian dollars except where noted otherwise.)
Aurora’s share price has been on the decline for a couple of years now, with the stock down roughly 70 per cent for 2020. The company completed a 12:1 share consolidation earlier this year in May after its share price dropped low enough that a consolidation appeared necessary to keep its NYSE listing. Since then, the stock has lost about half of its value.
Aurora delivered its fiscal first quarter 2021 results last week, showing revenue of $67.8 million, which was a drop of 4.2 per cent from a year earlier and flat compared to the previous quarter. That came with an EBITDA loss of $57.9 million, which involved $47.4 million spent on contract and employee termination costs including costs related to the termination of its agreement with sports company UFC. Aurora management said it expected to continue moving towards positive cash flow for 2021.
“Our Q1 2021 results are transitional but do highlight successes across a number of diverse profit pools,” said Miguel Martin, CEO, in a press release. “We remain the leader by revenue in the high-margin Canadian medical market, our international medical business experienced more than 40 per cent net revenue growth this quarter, and our CBD brand Reliva is Number One ranked by Nielsen in the U.S. CBD sector.”
In his update, Kideckel said he’s encouraged by Aurora’s focus on profitability, although the analyst is more cautious about ACB turning EBITDA-positive by the next quarter (calendar Q1 2021) and is instead forecasting that to happen in the fiscal 2022 year.
“We note that management is increasingly focused on positive free cash flow generation as it optimizes the Company’s asset-base and moves to a more asset-light, variable cost structure (as opposed to a capital-heavy, fixed cost-structure which requires more capital investments),” Kideckel said.
The analyst thinks ACB will generate fiscal 2021 revenue and adjusted EBITDA of $284 million and negative $75 million, respectively, and fiscal 2022 revenue and adjusted EBITDA of $390 million and $12 million, respectively.
“We believe that Aurora Cannabis is trading below its intrinsic value after the recent correction in its stock price. Our investment thesis on Aurora is driven by three factors: (i) Aurora’s ability to grow its revenue in-line with the overall Canadian cannabis industry; (ii) Aurora management’s focus on profitability; (iii) Aurora’ strong capital position. Following the raise, we estimate Aurora’s cash position to be ~$476mm. We believe that having a strong cash position is one of Aurora’s key advantages in this market scenario,” Kideckel wrote.
Kideckel said despite losing market share in the Canadian rec space over the past two quarters, Aurora is still among the top three companies in recreational cannabis and, further, it’s the leader in the Canadian medical market.
“In our view, Aurora’s renewed CPG go-to-market approach may enable the Company to expand its market share over the mid- to-long-term. Given our view on the potential growth of the Canadian cannabis industry, we believe that Aurora’s long-term sales growth outlook is positive,” Kideckel wrote.
Management said in its fiscal Q1 commentary that it would be concentrating on driving market share and looking to push its premium brand sales.
“While we are not satisfied with our past performance in the growing Canadian consumer business, we have a sense of urgency in the execution of our tactical plan to grow profitable market share,” the company said.
“Our efforts are directed at delivering the highest quality products, refocusing on our leading premium and ultra-premium brands, better allocating our sales and marketing spend, and executing key account partnerships at both the province and retail levels,” Aurora said