Steer clear of Aurora Cannabis, says ATB Capital

ATB Capital Markets analyst Frederico Gomes remains skeptical in regards to Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News, Analysts, Financials TSX:ACB), maintaining an “Underperform” rating and $5/share target price for a projected one-year return of eight per cent in an update to clients on Wednesday.

Founded in 2006 and headquartered in Calgary, Aurora Cannabis is a licensed cannabis producer which also sells indoor cultivation systems and hemp related food products. Gomes’s latest analysis comes after Aurora announced its intent to acquire TerraFarma Inc., the parent company of craft grower Thrive Cannabis, a move Gomes views through a neutral lens.

“We like Thrive’s focus on premium (higher-margin and consumers want higher-THC cannabis) and EBITDA profitability. We also like that ACB is refocusing on the rec. market with Thrive’s leadership team, which can help drive improvements in cultivation and product development,” Gomes said. “However, we are wary of Thrive’s relatively flat market share over the past year, the still incipient brand equity in Canada and the price paid by ACB for a premium-focused player which could have difficulties scaling.”

Thrive Cannabis, which was founded in 2018, features the Greybeard Cannabis and Being brands and is a licensed producer of cannabis concentrates and craft dried flower, specifically developing premium, high-terpene, high-potency branded cannabis. Although Greybeard was recognized as the top recommendation from Canadian budtenders in 2021, it hasn’t translated to market share for Thrive, which occupied 0.5 per cent as of February 2022.

Aurora will pay an initial consideration of $38 million in common shares based on its five-day VWAP two days prior to the effective date of the transaction, which would come out to approximately 8.2 million common shares. From there, a $10 million earnout possibility exists if Thrive satisfies near-term revenue targets, along with a $20 million earnout for satisfying longer-term revenue targets within two years of closing the transaction, payable in cash or shares.

From Aurora’s perspective, the transaction, which management anticipates will close in the fourth quarter of its 2022 fiscal year, will bolster its position in the Canadian market by assigning Thrive’s leadership over its Canadian recreational business.

“As consolidation among licensed producers accelerates, it’s vital that any transactions we make, now or in the future, be strategic, accretive, and centred around adding exceptional talent and brands that align with our path to profitability,” said Miguel Martin, Chief Executive Officer of Aurora Cannabis in the company’s March 22 press release.

“In these respects, Geoff and the Thrive team have a track record seldom found elsewhere in the Canadian market. They are truly exceptional cultivators who have gained trust with consumers and developed products that have been recognized and acclaimed by Canadian budtenders and industry peers. We see a unique opportunity to leverage their expertise to deliver near and long-term benefits for both our recreational and medical markets,” Martin said.

From his February 10 analysis, Gomes 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 projected 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 forecasted 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 introduced 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 59.3 per cent loss, with a 37.8 per cent loss reported since the start of 2022. The stock has fallen off significantly since its 52-week high of $12.38/share from June 9, recently hitting a 52-week low of $3.76/share on March 14.