Aurora Cannabis is still a pass, says ATB Capital

ATB Capital Markets analyst Frederico Gomes has become even more anxious about Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News, Analysts, Financials TSX:ACB), maintaining an “Underperform” rating on the company while cutting his target price from $5.75/share to $5/share for a projected one-year loss of 15 per cent in an update to clients on Thursday.

Founded in 2006 and headquartered in Calgary, 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 second quarter financial results for the 2022 fiscal year, which Gomes noted to be in line with ATB expectations, while the adjusted gross profit and adjusted EBITDA came in above consensus estimates.

“The higher-than-expected profitability was driven by SG&A savings and a mix tilted towards higher-margin international sales which benefited from a $10 million shipment to Israel,” Gomes said.

Aurora’s quarterly reports were highlighted by $60.6 million in revenue, in line with the ATB estimate of $55.2 million and the consensus projection of $59.1 million and representing a 0.8 per cent sequential increase.

“Q2 total cannabis net revenue held steady sequentially, driven by our industry leading, high margin global medical cannabis business,” said Miguel Martin, CEO of Aurora in the company’s February 10 press release. “New international markets are rapidly opening, and with the unique ability to navigate complex regulatory environments, we see a significant revenue opportunity of which we are at the forefront. While the Canadian adult-use market continues to face challenges, we are focused on introducing a new range of products set to launch this spring.”

Meanwhile, the company experienced strong margin reporting in the quarter, particularly the $32 million in adjusted gross profit with a 52.8 per cent margin representing a significant improvement over the $26.7 million and 44.5 per cent margin from the previous quarter. In terms of analysis, the company’s report came in well ahead of the ATB estimate of $21.7 million and a 39.4 per cent margin, as well as being up on the consensus projection of $26.3 million and a 44.5 per cent margin.

In a similar vein, the company’s adjusted EBITDA loss of $9 million in the quarter represented an improvement over the $12.1 million loss in the previous quarter. The figure is also a beat on the ATB estimate of a $23 million loss, while the consensus projection was a bit closer at a $12.3 million loss.

“We continue to like ACB’s margins but we lack visibility over the growth outlook due to lackluster rec. sales, lumpy international markets, and a diminishing Canadian medical market,” Gomes said. “We maintain our thesis that ACB’s market value implies overly demanding growth expectations, and we keep our cautious stance on the stock.”

With declining sales in the recreational market playing a role, Gomes has lowered his revenue expectations for the company, beginning with a reduced estimate of $228.3 million in 2022 (previously $232 million), implying a year-over-year loss of 6.9 per cent. From there, Gomes projects Aurora’s revenue starting to grow again, albeit with a reduced projection of $244.8 million in 2023 (previously $282.1 million) for year-over-year growth of 7.2 per cent, with a further projection of $318.6 million in 2024 for a year-over-year increase of 30.1 per cent.

Meanwhile, Gomes projects the company’s EV/Net Sales multiple to increase from 4.7x in 2021 to 5.1x in 2022 before dropping back to 4.7x in 2023, then dropping to a projected 3.6x in 2024.

After projecting a loss of $26.2 million in 2022 to follow a $118 million loss in 2021, Gomes forecasts Aurora’s adjusted EBITDA to turn positive in 2023 at $1.7 million for a 0.7 per cent margin, followed by an increase to a forecasted $29.9 million and a 9.4 per cent margin in 2024. Gomes introduces an EV/EBITDA multiple of 672.9x in 2023, with a dramatic fall to a forecasted 38.8x in 2024.

According to Gomes, the company’s gross profit margin will remain around 48 per cent for the next few years, with a 48 per cent margin ($109.5 million gross profit) in play for 2022 before growing to 48.9 per cent ($119.8 million) in 2023, then dipping down to a projected 48.2 per cent ($153.5 million) in 2024.

Aurora’s stock price has been on a downward trend over the last 12 months at a 67.5 per cent loss, with a 19 per cent loss reported since the start of 2022. The stock has fallen off significantly since its 52-week high of $18.31/share from a year ago today, recently hitting a 52-week low of $4.81/share on January 27.