Aurora Cannabis (ACB) is burning more money than its customers are burning cannabis.
The company announced a $125 million offering sending the shares down by over 20%. This is coming on the heels of the company saying that revenue was going to be falling.
The news prompted Stifel analyst Andrew Carter to put a "Sell" rating on the stock. He wrote, "We were perplexed when the company announced that it had exhausted its ATM facility in late October. The implied cash burn through the first 37 days of the quarter (C$83 million with just over C$20 million in unique items) suggests cash needs outside the scope of our expectations with the ATM exhaustion following fourth quarter earnings at roughly C$6.40 per share now seemingly pragmatic."
The analyst suggested that the offering implied a sense of urgency. He has a target price now of C$6.50. His breakdown is as follows: C$308 million of cash, C$31 million for inventory, C$444 million for property and equipment, C$150 million for intellectual property, C$240 million for the Canadian medical platform and C$70 million for the German distribution business. "We net this total C$1.2 billion in liquidation value against nearly C$600 million in liabilities," he wrote. His sum-of-the parts analysis implies a value of C$4 per share.
Carter now estimates sales for fiscal year 2021 will be C$309 million, down from C$326 million. Fiscal year 2022 sales are now estimated to be C$435 million down from the previous estimate of C$462 million. He did give that a caveat that is assuming Aurora keeps pace with its competition as competing in Canada is becoming an expensive endeavor. Keep in mind that the Canadian market is growing, but Aurora's revenue, albeit a large number, is falling.
Cantor Fitzgerald Stays Neutral
Cantor Fitzgerald is keeping its "Neutral" rating on Aurora and analyst Pablo Zuanic wrote, "Despite the swings in the stock in recent days, we are only tweaking our 12-month PT to C$12 from C$13 (due to the higher share count), taking 20x on our forward EBITDA estimates (Dec 2021 to Nov 2022). Ex-guidance/expectations, in our view, the Sep qtr print brought disappointment in several ways: a sales drop in domestic rec/med, with clear rec share loss, margins worsened and so did cash burn."
His arithmetic for the valuation was as follows: "Taking the US$125Mn equity offering price of US$7.50 (10% discount to Tuesday's close), 177mn shares, and the new proforma net debt of $41Mn, ACB trades at 6.7x EV/current sales compared with 7x for TLRY and 8x for APHA and VFF (CPG-based stocks like CRON and WEED trade at 40x and 19x). The volatility notwithstanding, we think the relative valuation leaves little downside."
Misunderstanding the Market
In September, Aurora noted that its medical cannabis business has remained steady, but that its retail business continued to have problems. The company focused its efforts on the value brand Daily Special. CFO Glen Ibbott said, "Daily Special our value brand accounted for 62% of total net consumer revenue from flower in the quarter as compared to 35% in the third quarter. This is the primary factor impacting the decline in our average selling price per gram of dried cannabis flower."
The company also noted that once it began to focus on a value brand that its competitors did as well. Ibbott added, "I think the company got a bit distracted by the success that they saw with that discount offering which was Daily Special, which sort of delayed other endpoints such as vapor and pre-rolls. There is a lot of growth in the category and then everyone else kept piling in and because there with such a reliance upon that discount business and a lot of different ways both on the gross side, on the sales side, on the trade marketing side when that was just completely you know pressed against by competitive pricing pressure it became hard to pivot."
Aurora is now putting its focus on premium products since the value side fell apart. However, it isn't that simple to move the focus from cheap cannabis to a product that repeat customers are willing to spend lots of money on. Aurora CEO Miguel Martin said on the company's earnings call, "What I can tell you is that you are going to see a significant focus on our premium flower and then we have some tremendous brands, as you know, Whistler, San Raf and Aurora. First and foremost, it takes a little bit to get those premium brands we settled. Secondly, we have had very substantive and good conversations with our trade partners about that. And third, we have to look at in some ways, looking into better articulation on format and packaging, and those things take a little bit longer than just flipping a switch and saying we care about San Raf, Whistler and Aurora."
While the premium market is lucrative, it is a smaller group of consumers. A regular cannabis consumer that is going to a dispensary two to three times a month begins to make a value price decision when choosing a product. Often the choice is for the lower priced product.
