Aurora Cannabis is still a pass, says ATB

Weakness across the Canadian cannabis sector has prompted ATB Capital Markets analyst Frederico Gomes to stay cautious about Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News, Analysts, Financials TSX:ACB), maintaining an “Underperform” rating and reducing his target price in an update to clients on Monday.

The latest update from Gomes comes ahead of the release of its third quarter financial results for the 2022 fiscal year from the Calgary-based Aurora, with the Q3 expected to be released on Thursday.

“We are adjusting our estimates ahead of the quarter to factor in (1) weaker-than-anticipated industry sales in calendar Q1/22; (2) the acquisition of Thrive Cannabis, which closed on May 5: and (3) a more cautious view on operating expenses due to inflationary pressures,” Gomes said.

Gomes lowered his quarterly revenue forecast from $53.1 million to $51.7 million, adjusted gross profit from $25.6 million to $24 million and the adjusted EBITDA from a loss of $2.3 million to a loss of $5.9 million. 

All three revisions are roughly in line with or slightly below the consensus estimates of $54 million in revenue, $22.8 million in adjusted gross profit and a $9.7 million loss, respectively.

“Our numbers reflect a ten per cent quarter-on-quarter decline in recreational sales due to the industry slowdown in calendar Q1/22 and ACB’s continued market share losses, as well as a more conservative view on margins and cost-cutting initiatives,” Gomes said.

Estimates have also been modified in the wake of Aurora officially closing its transaction of Thrive Cannabis for aggregate initial consideration of $38 million paid in cash and Aurora common shares as well as up to $30 million in potential earnout amounts, payable in cash, Aurora Shares or a combination of both, subject to Thrive meeting certain revenue targets within two years of closing.

“With the transaction closing, we officially welcome Geoff Hoover and his team to Aurora,” said Miguel Martin, CEO of Aurora Cannabis in a May 5 press release. “We look forward to the expertise they will bring to our Canadian recreational business and Aurora’s leadership in the global cannabis space.”

Along with the more immediate revisions, Gomes has made changes to his overall 2022 estimates, lowering his net revenue target from $228.3 million to $226 million, which would bring about a year-over-year decrease of 7.9 per cent. Looking ahead to 2023, Gomes maintained his estimate of $244.8 million for a potential year-over-year increase of 8.3 per cent, which is the start of a long-term growth ramp reaching a projectd $1.64 billion in 2031, producing a 10-year CAGR of 20 per cent.

From a valuation perspective, Gomes forecasts the company’s EV/Revenue multiple to rise from the reported 2.9x in 2021 to a projected 3.2x in 2022 then returning to 2.9x in 2023.

Gomes also changed his adjusted EBITDA projection from a $94.4 million loss to a $33 million loss for the end of 2022, while lowering his 2023 estimate from a $1.7 million positive EBITDA to a $9.6 million loss ahead of a positive turn of $31 million for a 10 per cent margin in 2024, which is also when Gomes introduces an EV/EBITDA multiple of 22.8x.

Gomes also lowered his 2022 adjusted gross profit expectation from $110.8 million and a 48.5 per cent margin to $108 million and a 47.8 per cent margin, while also lowering his 2023 expectation from $119.8 million and a 48.9 per cent margin to $117.7 million and a 48.1 per cent margin.

In lowering the margin estimates, Gomes pointed to higher operating expenses, incorporating inflationary pressures and a more cautious view on the Company’s ability to cut costs further.

“Though we favor ACB’s balance sheet (robust capital position relative to other Canadian LPs) and focus on profitability, we view a challenging near-term outlook due to lackluster recreational sales, lumpy international sales, and a shrinking Canadian medical cannabis market,” Gomes said. “Our thesis is that ACB’s market value implies overly demanding growth expectations considering its margin-focused strategy in Canada and the uncertainty of international markets.”

Aurora Cannabis has seen its stock price tumble to a 55.3 per cent loss since the start of 2022, unable to sustain an early peak of $7.41/share on January 11 and closing Monday at a 2022 low of $3.29/share. With his maintained “Underperform” rating, Gomes has reduced his target price from $5/share to $4/share for a projected one-year return of 22 per cent at the time of publication.