ATB Capital Markets analyst Frederico Gomes remains cautious on Canadian LP Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News, Analysts, Financials TSX:ACB), maintaining an “Underperform” rating on the company but lowering his target price in an update to clients on September 27.
Founded in 2006 and headquartered in Edmonton, Alberta, Aurora Cannabis engages in the production, distribution and sale of cannabis products. It also produces and sells indoor cultivation systems and hemp related food products.
Gomes’s latest analysis comes after Aurora Cannabis reported its fourth quarter fiscal 2021 financial results, which Gomes noted to be in line with ATB expectations but below consensus estimates.
“Sales remained flat as ACB continued its cost-cutting plan. While we view these cost-control efforts as crucial for the Company to achieve adj. EBITDA profitability, we believe that ACB’s current market value implies overly demanding growth expectations considering the size of and competition in the Canadian recreational market, as well as the volatile nature of international medical cannabis sales. As such, we maintain our cautious stance on the stock,” Gomes wrote.
The company’s fiscal Q4 was headlined by $54.8 million in revenue, slightly below the $55.2 million reported in the third quarter, though the number came in slightly ahead of ATB’s projection of $53.1 million but fell below the consensus estimate of $56.2 million. Of the company’s revenue, approximately 64 per cent came from medical cannabis sales, with 36 per cent coming from adult use cannabis sales and a minimal contribution ($300,000) coming from wholesale revenue.
Meanwhile, the company’s adjusted gross profit came in at $17.2 million for a 31.4 per cent margin, beating the ATB projection of $13.4 million and a 25.2 per cent margin but coming in below the consensus estimate of $20.7 million.
From an EBITDA perspective, the company underperformed at a loss of $19.3 million compared to the consensus estimate of a $16.5 million loss and the ATB projection of a $17.2 million loss.
The company also recognized a $55.2 million impairment on PP&E primarily associated with the closure of production facilities as well as a $41.2 million impairment on intangible assets and goodwill related to its acquisition of Reliva, a premium CBD products health and wellness company.
“Given ongoing challenges in the Canadian adult recreational market, our broad diversification across domestic medical, international medical, and adult recreational segments provides us with underlying strength, stability, and growth opportunities in an evolving industry for global cannabinoids,” said Miguel Martin, CEO of Aurora Cannabis in the company’s September 27 press release.
“Additionally, our enviable leadership position as the #1 Canadian LP in global medical cannabis by revenue on a trailing twelve-month basis, supported by regulatory and compliance expertise, is a tailwind that we expect to enable us to ultimately expand into global adult recreational as medical regimes evolve,” Martin said.
Of late, Aurora has announced a shipment of cannabis valued at approximately $8 million to Israel in July, while delivering its initial shipment of cannabis to France as part of a joint program with Ethypharm as part of a pilot project in August and it has announced its entry into the Uruguayan market with Bidiol, a medical cannabis oil wholly produced domestically, which will be available in concentrations of three and 10 per cent in 10mL and 30mL bottles in pharmacies across the country.
Looking ahead, Gomes is calling for fiscal 2022, 2023 and 2024 revenue of $256.9 million, $352.7 million and $404.7 million, respectively, and 2022, 2023 and 2024 adjusted EBITDA of negative $71.5 million, negative $1.1 million and positive $35.7 million, respectively.
Our lower price target is driven by our lower profitability estimates, partially offset by our higher terminal growth rate of three per cent (from two per cent) which is now in line with other LPs in our coverage. We believe that this higher terminal growth rate better reflects the steady-state scenario of the global cannabis industry by the end of our forecast period,” Gomes wrote.
With the update, Gomes has dropped his target from $7.50 to $6.00, which at the time of publication represented a projected one-year return of negative 31 per cent.