After reviewing the company’s latest quarterly financials, ATB Capital Markets analyst Frederico Gomes has a bit better frame of mind toward Canadian cannabis licensed producer Aurora Cannabis (Aurora Cannabis Stock Quote, Charts, News, Analysts, Financials TSX:ACB), but it’s not enough to move the stock into buy territory. In a Wednesday report, Gomes raised his rating from “Underperform” to “Sector Perform,” saying the way forward is still unclear for Aurora.
Edmonton-headquartered Aurora Cannabis reported fourth quarter fiscal 2022 financials on Tuesday for the period ended June 30, 2022. Revenue was down eight per cent year-over-year to $50.2 million and down slightly from $50.4 million over the previous quarter. Aurora saw it Medical cannabis business grow by four per cent year-over-year to $36.6 million, while Consumer cannabis dropped 35 per cent from a year earlier to $12.6 million.
On earnings, Aurora’s adjusted EBITDA was a loss of $12.9 million compared to a loss of $21.8 million a year earlier and compared to a loss of $11.4 million over the previous quarter. Management said it continues to expect a positive adjusted EBITDA run-rate by December 1 of this year.
“We continue to enhance the long-term value of our differentiated global cannabis business by quickly identifying highly profitable growth opportunities, deploying capital in a disciplined manner, and continuing to rationalize our cost structure. We remain the #1 Canadian LP in global medical cannabis revenues and expect this high margin, high growth segment to be a key driver for future profitability,” said CEO Miguel Martin in a press release.
Aurora said the increase in Medical cannabis came from international sales which were up 35.4 per cent year-over-year, while the sequential drop in Medical sales was caused by a temporary supply issue as well as weakness in the Euro.
On the M&A front over the quarter, Aurora completed the acquisition of premium cannabis producer Thrive Cannabis for $38 million in cash and shares and up to $30 million in earnouts, with the new business contributing in part to ACB’s fourth quarter. The company also completed a bought deal financing round over the quarter for gross proceeds of $172.5 million.
Looking at the quarter, Gomes called the results “mixed,” noting the net revenue of $50.2 million was slightly above ATB’s estimate at $49.7 million and in line with the consensus call at $50.3 million. Adjusted gross profit for the Q4 of $23.9 million was under Gomes’ forecast at $24.7 million but above the Street’s $23.3 million, while adjusted gross margin of 47.6 per cent was again under Gomes’ 49.8 per cent but above the consensus at 46.3 per cent. Aurora’s adjusted EBITDA loss of $12.9 million was greater than Gomes had predicted at a loss of $9.2 million and the Street’s call of negative $7.7 million.
“The consolidation of Thrive Cannabis contributed $1.4 million in revenue towards the consumer cannabis segment in Q4/FY22. Excluding this impact, consumer cannabis sales would have increased $0.9 million quarter-on-quarter (only ~8.7 per cent growth), as the Canadian rec. landscape remains challenging (management cited that the average net selling price per gram fell six per cent quarter on quarter),” Gomes wrote.
“Given these challenges, the Company continues to focus on higher-margin pockets of the rec. market (such as premium products) and continues to emphasize that future investments will focus on international medical markets, as the Company reduces its cost structure to operate more efficiently,” he said.
Gomes estimated Aurora’s free cash flow for the quarter was negative $29.6 million, while the company exited the quarter with $370.0 million in cash and US$186.2 million left under its at-the-market credit facility. With debt at the quarter’s end of $269.0 million, Gomes estimated ACB’s fully diluted net cash position at $162 million.
“In our view, ACB continues to have one of the strongest capital positions amongst its peers, leaving sufficient resources to execute its strategy and bridge to adj. EBITDA profitability. According to management, strategic acquisitions in the medical cannabis (including in the ancillary technology and software verticals) and other segments will be considered on the Company’s path to profitability,” he said.
Looking ahead, Gomes said he has reduced his medical sales estimates to factor in the continued uncertainty on the international side and a shrinking market on the Canadian side. The analyst is forecasting Aurora’s turn to positive EBITDA to likely come in the fiscal 2024 year rather than management’s guidance of the third quarter fiscal 2023.
Along with the revised “Sector Perform” rating, Gomes has dropped his target price from $3.00 to $2.00, which at press time represented a projected one-year return of 15 per cent.
“Despite the PT reduction, we are upgrading ACB to Sector Perform as a result of a stronger balance sheet (net cash position of ~$162 million) and an improved risk-reward given the recent stock pullback,” Gomes wrote.