Aurora Cannabis (TSX: ACB) is a leading licensed producer of cannabis products focused on providing premium, innovative products to patients and consumers globally.

Key Updates:

• New product launch: Recently, the company announced its launch of KG7, a new high-quality CBD product line developed for adult consumers with an active lifestyle. This is expected to enhance the company’s presence into additional CBD market segments.

• Healthy D/E ratio: The company reported a lower D/E ratio of 0.21x in Q2FY22, as compared to the industry median of 0.46x. A lower D/E ratio indicates greater financial flexibility. Moreover, the company’s long-term debt to total capital stood at 15.6% in Q2FY22, significantly lower than the industry median of 26.8%. This indicates lower balance sheet risk and is a key positive.

• Reported CAD 10 million shipment to Israel: Recently, the company reported a CAD 10 million delivery of cannabis shipment to Israel, which is believed to be the largest export of medical Cannabis into the Israeli market. This is expected to be add to the revenue of Q2FY22. Additionally, this marks the growing demand of the company’s product into the international market, which is likely to strengthen the company’s operations in the long run.

Risks:  The products are fairly new to the consumers, and hence lower acceptability of the products might take a hit on the company’s sales volumes. Moreover, the arrival of any new player might lower the company’s market share.

Q2FY22 Financial Highlights:

Q2FY22 Income Statement Highlights (Source: Company Report)

• In Q2FY22, the group reported its net revenue of CAD 60.5 million, as compared to CAD 67.6 million in Q2FY21. The decline was primarily due to continued pricing downward pressures due to competition.
• Gross profit stood lower at CAD 5.5 million, as compared to CAD 12.2 million reported in Q2FY21. This was primarily due to lower income coupled with higher cost of sales.
• Operating expenses stood lower at CAD 61.3 million, as compared to CAD 64.3 million in pcp. Loss from operations stood at CAD 55.7 million, as compared to CAD 52.1 million in pcp.
• The group reported a lower net loss of CAD 75.1 million, as compared to a net loss of CAD 297.9 million in pcp. This was primarily due to lower impairment expenses in current period (CAD 4.2 million v/s CAD 221.6 million in pcp).

Valuation Methodolgy(Illustrative) : EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:            

The company is emphasizing on cost efficiency programs and reported a lower operating expense of CAD 126.196 million in H1FY22, as compared to CAD 132.926 million in pcp. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Charlotte's Web Holdings Inc, OrganiGram Holdings Inc etc. Considering the aforesaid facts, we recommend a Hold' rating on the stock of ACB at the closing price of CAD 5.74 on February 11, 2022.

One-Year Technical Price Chart (as on February 11, 2022). Analysis by Kalkine Group.

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