Bottom Line

Aurora’s (TSE: ACB; NYSE: ACB) earnings show us the legalization of cannabis is not going smoothly.

Fits and starts are to be expected in a previously illegal industry, but publicly traded stocks have gotten way far ahead of the fundamentals of cannabis.

The markets have regained some rationality but we think a lack of cash across the industry will drive even lower stock prices into year-end.

The industry was driven by hype for years leading up to legalization and ever since October 2018 investors have been disappointed by reality again and again and again.

The markets have regained some rationality but we think a lack of cash across the industry will drive stock prices even lower into year-end.

When you are losing money and running out of cash, the market will not be kind to your stock.

Aurora needs to start showing a profit, or do a deal that brings in much-needed cash. Until then we struggle to see what can drive this stock higher.

Even at US$2.73/C$3.59 Aurora still trades at 28 times analysts 2021 EBITDA estimate (a measure of cashflow). Comparable industries like Liquor, Beer and Big Pharma trade for 10x-15x EBITDA. Without a catalyst, Aurora will continue to slide in our view.
Average Analyst Estimate (In Millions)
Current Market Value (EV)$4,414
EBITDA Estimate (2021)$156
Multiple of EBITDA28x
Implied EBITDA Margin18%

Where Are the Write-downs?

The fact we aren’t seeing any write-downs from Aurora even with revenue down 20% tells us management is doing anything and everything to keep the goodwill value up.

Canopy Growth actually grew revenue and still wrote down assets.

The pain is not over yet for Aurora until they admit the deal done for MedReleaf at $50 per gram of capacity will never be worth that price.

Investors are not stupid and will be waiting for the inevitable write-downs before putting all of their chips on the table.

In our opinion, better to come clean when the market is already expecting a write-down and set yourself up to exceed expectations as cannabis demand rebounds next year.

Instead, management is going to go down fighting, hoping to drop a big write-down when times are good and the market no longer cares.

It’s never that easy.

 

Even the #2 Licensed Producer Is Running Low on Cash

Aurora, the number two largest cannabis company in the world was not without its own cash problems today, announcing an attempt to convince lenders holding $230 million of convertible debt to convert at a new lower exercise price.

This was done out of necessity as Aurora doesn’t have $230 million of cash to pay back these lenders in March of 2020. This was a prudent move but will now result in 58 million shares floating around, 6% dilution to current shareholders.

Aurora’s share count just keeps going up, requiring bigger profits just to keep the stock price flat.

 

Earnings Review

As the Canadian cannabis industry continues to struggle a year on from legalization, Aurora Cannabis Inc. (NYSE: ACB) today released its fiscal Q1 2020 numbers.

That report showed production declined in the quarter driven by far less recreational sales than in the last quarter. Production costs were down, which is a positive, but still increased on a per gram basis because of the large fall in volumes sold.

As a result of less volumes sold, Aurora’s net revenue from cannabis actually dropped from $94.6 million last quarter to $70.8 million.

While medical sales saw a slight uptick with the company’s patient base increasing, overall cannabis sale numbers were down as Aurora received fewer orders from provincial governments.

To cut costs as stock prices continue to decline, Aurora will lower investments over the coming year by $190 million, significantly slowing down the rapid pace of expansion seen over the last year.

That plan includes an immediate end to all construction of the Aurora Nordic 2 location, as well as putting off most of the remaining construction plans for Aurora Sun, although the latter site will still have six flowering rooms running next year.

Discussing the quarterly numbers and plans to cut costs, Chief Executive Officer Terry Booth commented:

Aurora has, and will continue to focus on everything in our control. Our success in doing this was demonstrated again this quarter by strong improvement in our core KPIs. We delivered solid operating, exemplified by our industry-leading cash cost to produce which declined another 25% to $0.85 per gram this quarter, as well as by our industry-leading gross margins and market share.

That reduction in costs for cultivation — as well as the company’s move to raise $86.5 million by selling off all shares of The Green Organic Dutchman — resulted in Aurora seeing $53.7 million in gross profit for the quarter.

Aurora’s adjusted EBITDA loss actually increased from last quarter, with the company reporting an EBITDA loss of $45.6 million in Q1 2020, up from $21.8 million in Q4 2019.

As the new quarter gets underway, Aurora is looking towards expanding U.S. operations while preparing for the sale of new value-added cannabis products that will become legal to hit Canadian shelves next month.