Not All Analysts Believe ACB has Zero Value


Dec. 22 2019, Published 12:18 p.m. ET

On December 19, AltaCorp Capital analyst David Kideckel started coverage for Aurora Cannabis (ACB). He gave it a “Sector Perform” rating. He set ACB’s target price at $5.0. This implies an upside potential of 122.22% based on the last closing price.

The analyst anticipates near-term challenges for the company mainly arising from the regulatory delays in Canada’s cannabis market. He remains concerned about the slower-than-anticipated retail rollout in Canada and the resultant supply-demand mismatch. However, he remains confident about ACB’s long-term growth prospects in the legal Canadian cannabis market and international medical cannabis markets.

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Following this recommendation, Aurora Cannabis’ share price on NYSE rose by 3.65% and closed at $2.27 on December 19. Also, the stock rose by 4.21%. It closed at $2.97 Canadian dollars on TSE (Toronto stock exchange). On December 20, the stock closed at $2.25 on NYSE. It closed at $2.95 Canadian dollars on TSE.

ACB’s shares reported a steep fall in December 2019

ACB’s stock is down YTD (year-to-date) by 54.64% on NYSE. Also, it is down by 58.39% on TSE. The company’s shares fell by 10% from $2.5 on November 29 to $2.25 on December 20 on NYSE. The stock is down by 11.14% from $3.32 Canadian dollars on November 29 to $2.95 Canadian dollars on December 20.

Despite such a steep downfall, GLJ Research founder Gordon Johnson believes there is more downside risk for ACB. As reported by Tipranks, he started coverage for the stock with the “Sell” rating. Also, he set a target price of $0 at the end of two years. He expects the stock to be worthless by the end of 2021.

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Johnson highlighted concerns about the company’s lack of profitability and precarious debt situation. He expects an oversupply of cannabis in Canada in 2020, which in turn will push down prices. The analyst has estimated cannabis production of 3 million kilograms in 2020. This is against his projected demand of 1.06 million kilograms for Canada. He expects this trend to be a major driver of ACB’s continued losses.

Gordan Johnson warns against ACB’s debt

Also, Johnson pointed out the dramatic rise in the company’s total debt in the past two years. He believes that the company will have to refinance its debt through new loans. Or, he suggests, it will further dilute equity to raise capital. However, Johnson fears that the company will most likely break the debt covenants. In turn, this will cause banks to demand their money back.

ACB’s debt covenant says the company’s debt cannot exceed four times EBITDA by the end of fiscal 2020 Q3. However, most of the analysts do not expect ACB to become EBITDA-positive in fiscal 2020. In this backdrop, other banks may also shy from financing ACB’s debt.

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Norman Levin worries for the entire cannabis sector

On December 19, Portfolio Management Corporation managing director Norman Levine was interviewed by BNN Bloomberg. The fund manager explained that he would stay away from cannabis stocks. Levine highlighted the seemingly implausible valuation metrics of these companies.

Levine pointed out the lack of profitability and major competition as challenges for the industry. Low brand recognition is also an issue. He expects a shakeout and consolidation in the cannabis industry.

Yet, Levine believes in the long-term growth story of the cannabis industry. However, companies must figure out how to become profitable.

AltaCorp Capital analyst David Kideckel is more positive

David Kideckel pointed out ACB’s solid position in the medical and recreational marijuana markets. He estimates ACB’s share in Canada’s recreational market to be 19%. He expects ACB’s revenues to be $361 million in fiscal 2020. Also, he expects it to be $524 million in fiscal 2021. The analyst projected ACB’s adjusted EBITDA to be -$100 million in fiscal 2020 and -$54 million in fiscal 2021.

The analyst is optimistic about the revenue growth and profit potential of the company. This is partly driven by the Cannabis 2.0 launch. He also expects international market expansion and CBD to provide robust opportunities.

Kideckel expects ACB to enjoy a competitive advantage in the long-term, driven by its focus on innovation. He expects the company to benefit from its investment in CIC (Cannabis Innovation Center) and in Aurora Prairie.

Kideckel expects robust performance from ACB in the Cannabis 2.0 market. He based his view on the company’s performance in the first year after recreational marijuana was allowed in Canada. Also, the analyst noted high ranking and ACB brand recognition in the Ontario Cannabis Store.


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