Aurora Cannabis is still a pass, says ATB

ATB Capital Markets analyst Frederico Gomes is still wary of Aurora Cannabis (Aurora Cannabis Stock Quote, Chart, News, Analysts, Financials TSX:ACB), maintaining an “Underperform” rating and $3/share target price in a recent update for a projected one-year return of 52 per cent.

Calgary-based Aurora Cannabis produces, distributes and sells cannabis products along with indoor cultivation systems and hemp-related food products.

The latest update from Gomes comes after the company completed a bought deal equity financing valued at US$172.5 million.

“In our view, the raise is in line with management’s previous comments on maintaining a strong cash balance that reduces risk, provides a long runway to execute the Company’s strategy, and endows the Company with optionality for potential M&A,” Gomes said in a June 2 report. “We have adjusted our model to reflect the equity raise, with no further changes to our estimates.” 

Under the terms of the financing, the company sold approximately 70.4 million units at a price of US$2.45 per unit, with each unit featuring one common share and one warrant at an exercise price of US$3.20 (approximately $4.03), which has a three-year exercisable window. (All figures in Canadian dollars except where noted otherwise.)

“In our previous commentary on the LP market, we outlined our thesis that consolidation of Canadian LPs will not occur for at least two years, for the simple reason that large, public LPs can raise capital to navigate a longer period of unprofitable operations,” Gomes said. “For these reasons, we view this raise as positive given that we believe LPs must have a robust capital position to navigate this volatile market.”

With the closing of the financing, Gomes forecasts the company to have pro forma fully diluted net cash of approximately $266 million, including approximately $480 million in the balance sheet as of March 31, paired with the new financing and proceeds from the exercise of ITM securities and other subsequent events.

Looking at present cash flow, Gomes believes Aurora Cannabis has approximately $549 million in cash available, along with US$186 million in a debt facility, compared to approximately $283 million in debt.

Since the announcement of the bought deal financing, Aurora also announced that it has repurchased an aggregate of approximately $25.3 million (US$20 million) principal amount of its convertible senior notes at a total cost, including accrued interest, of $24.3 million (US$19.2 million) in cash, done with the aim of reducing the company’s debt and annual cash interest costs.

Furthermore, the company also received EU-GMP certification for medical cannabis production facility in Germany, expanding its network and ability to provide premium, high-quality cannabis flower and extracts for medical use by patients across existing and expanding markets.

“With the EU-GMP certification of our first German site, we once again demonstrate Aurora’s excellence and leadership in establishing the necessary infrastructure to compete in the global cannabis market,” said Miguel Martin, CEO of Aurora Cannabis in a May 18 press release. “As a leading provider of medical cannabis in Germany and several other European markets, we are eager to accelerate patient access to high-quality, reliable cannabis produced in accordance with the most stringent criteria.”

In terms of financial projections, Gomes forecasts decreases in revenue for the next two fiscal years, as he projects a 10 per cent year-over-year decrease to $220.8 million in 2022, followed by a further 5.4 per cent year-over-year drop to a projected $208.9 million in 2023. However, Gomes forecasts a rebound in 2024, with the $254.6 million projection representing a potential year-over-year increase of 21.9 per cent and putting it on a track toward a 10-year CAGR of 17 per cent.

Accordingly, Gomes also forecasts subtle increases in the company’s EV/Revenue multiple from the reported 1.4x in 2021 to a projected 1.5x in 2022, then to 1.6x in 2023 before dropping to a projected 1.3x in 2024.

Notably, Gomes forecasts a significant shift in its revenue mix, with consumer cannabis dropping from the reported 41 per cent in 2021 to just 24 per cent by 2024, giving rise to increased influence from its international medical cannabis stream (15 per cent in 2021, projected 36 per cent in 2024), while Canadian medical cannabis projects to remain the top generator at 40 per cent of the mix in 2024, down slightly from the reported 44 per cent in 2021.

On the margins, Gomes maintains a consistent gross margin projection of 50 per cent throughout the reporting period (gross profits of $110.8 million in 2022, $103.7 million in 2023, and $127.8 million in 2024), while he forecasts the company’s adjusted EBITDA to be negative in 2022 ($42.6 million loss) and 2023 ($5.2 million loss) before turning positive in 2024 at a projected $38.3 million for a 15 per cent margin. Gomes also introduces an EV/EBITDA multiple projection in 2024, setting the bar at 8.7x.

Aurora’s stock price has fallen by 72.7 per cent since the start of 2022, unable to sustain an early high of $7.41/share from January 11 as it fell to a low of $1.97/share on Thursday.