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:

• Healthy D/E ratio: The company reported a lower D/E ratio of 0.20x in Q3Fy21, 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 14.9% in Q3FY21, lower than the industry median of 25.6%. 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.

• Cost saving initiatives: The company is emphasizing on cost saving initiatives primarily through improving its supply chain and selling general & administrative costs. This is expected to result in an expected quarterly cost savings of CAD 15 to 20 million, which looks promising. Moreover, the group is targeting a positive adjusted EBITDA by mid of FY23 without depending on revenue growth.

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.

Q1FY22 Financial Highlights:

Source: Company Report

• In Q1FY22, the group reported revenue of CAD 60.0 million, as compared to CAD 67.5 million reported in Q1FY21.
• Gross profit stood lower at CAD 25.4 million, as compared to CAD 35.0 million reported in Q1FY21.
• Operating expenses stood lower at CAD 64.8 million, as compared to CAD 68.5 million in pcp. The company reported its EBITDA of CAD 24.4 million, as compared to an EBITDA loss of CAD 61.9 million in pcp.
• The group reported a lower net loss of CAD 11.8 million as compared to a net loss of CAD 101.3 million in pcp.
  

 Valuation Methodolgy(Illustrative) : EV to Sales based 

Analysis by Kalkine Group

Stock Recommendation:             

The Company expects the consumer demand for products containing CBD derived from hemp plants is expected to provide exciting growth opportunity in the coming years, while the group is well poised to take advantage of it. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Tilray Brands Inc, Green Thumb Industries Inc etc. Considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock of ACB at the closing price of CAD 5.33 on January 25, 2022.

One-Year Technical Price Chart (as on January 25, 2022). Analysis by Kalkine Group

 Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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