Aurora Cannabis Inc.

Continued Challenges Limit Recovery: Aurora Cannabis Inc. (TSX: ACB) is a licensed producer of medical and consumer cannabis. The Canadian company has sales and operations in more than 20 countries across the globe.

Key Updates: The company recently announced that it has CAD 205 million of cash as of March 31. The cash includes the amount it raised from the US$ 400 million At-the-Market Offering program it announced in May 2019.  Moreover, the company further said that it intends to renew ATM program to raise additional equity capital of approximately US$ 350 million. Raising cash by selling common stock has destroyed shareholders’ value, which is one of the reasons why investors have dumped ACB stock. However, to company also announced to consolidate its common shares on the basis of 1 common share for every 12 common shares (reverse stock-split) effective from May 11, 2020.

Q2FY20 Financial Highlights: For the period ended December 31, 2020, ACB posted net revenue of CAD 56.03 million, as compared to CAD 54.18 million in the previous corresponding quarter. The group reported a higher loss from operations at CAD 119.61 million, as compared to CAD 80.19 million in pcp. The increase in higher loss was due to the combination of higher operating expenses like the cost of sales, general and administration, sales and marketing and research and development expenses. Net loss was posted at CAD 1,305.90 million, wider than CAD 239.64 million net loss in Q2FY19. The higher net loss was due to inclusion of impairment of goodwill and intangible assets of CAD 762.23 million and CAD 158.70 million, respectively followed by higher finance & other costs and other expenses. The company reported cash and cash equivalents of CAD 156.33 million, compared to CAD 172.72 million on June 30, 2019.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of ACB closed at CAD 1.06, with a market capitalization of CAD 1.24 billion on April 13, 2020. Aurora Cannabis, which once looked like a promising investment, has eroded a significant portion of investors’ wealth. ACB stock has declined more than 91% from its 52-week high of CAD 12.62. Besides, the stock is down more than 60% so far this year. Despite the massive fall, ACB stock fails to appeal. The recent reverse stock-split announcement is to protect itself from getting delisted on the New York stock exchange as its stock price fell below US$ 1. Also, ACB stock was getting hammered due to the equity dilution. Investors should note that the business is witnessing multiple challenges including liquidity, supply issues, increased losses, and production. During the second quarter, Aurora witnessed a 26% drop in production over the previous quarter. Given the persisting challenges, we recommend a ‘watch’ stance on the stock at the closing market price of CAD 1.06, down 13.12% as on April 13, 2020.

ACB One-Year Daily Price Chart (Source: Thomson Reuters)

Aritzia Inc.

Upside Seems Capped at the Current Levels: Aritzia Inc. (TSX: ATZ) designs fashion apparel and accessories for women. The company has 94 retail boutiques, including 67 in Canada and 27 in the U.S.

Similar to most the stocks listed on TSX, Aritzia got a fair amount of beating as significant demand erosion due to the rapid rise in COVID-19 cases took a toll on the markets across the globe. While the stock is still down more than 20%, it recovered sharply in the last few trading days.

Q320 Financial Highlights: Aritzia impressed with its Q320 financial performance. The company posted revenues of CAD 267.28 million in the third quarter, reflecting y-o-y growth of about 10%. The y-o-y growth in the company’s top line was due to the sustained momentum in the base business. Aritzia’s comparable sales rose 5.1% in the third quarter. Notably, the company’s comparable sales have increased in the last 21 consecutive quarters, which is encouraging. Revenues marked 3% growth in Canada, while top line increased by 28% in the U.S. Adjusted EBITDA increased by 2.4% y-o-y to CAD 58.4, thanks to the strong sales. Despite strong sales, adjusted net income decreased 0.6% y-o-y to CAD 35.7 million.

Financial Highlights (Source: Company Reports)

Stock recommendation: The COVID-19 spread has forced companies across the world to shut stores, with online being the only medium for sales. In response to the COVID-19 outbreak, Aritzia closed all of its retail locations since March 16. However, the company’s online business continues to operate. We believe the disruption in sales is likely to limit the upside in ATZ stock in the near-term. Despite its e-commerce business continuing to operate, we believe shoppers are likely to reduce shopping on non-essential items, like fashion apparel and accessories in the near-term. We expect traffic to take a significant hit as people stay indoors to curb the spread of the virus. Meanwhile, the uncertainty surrounding the economy makes it difficult to predict when the demand could pick up. We believe the company’s margins are at risk as lower sales will take a toll on its profitability. We expect the company to weather the current crisis, thanks to its strong liquidity position. Further, the company could return to growth in 2021. However, ATZ stock jumped more than 40% from its recent lows, which implies that the upside in stock is limited at the current levels. Also, ATZ stock is trading at a significant premium when compared to peers, which another reason why we see upside to be capped. ATZ stock trades at a forward P/E multiple of 21.1x, which is nearly double the peer group average of 11.1x. Considering the risk-reward profile, we recommend a “watch” stance on ATZ stock at the current market price of CAD 14.32, up 2.5% as on April 13, 2020.

ATZ One-Year Daily Price Chart (Source: Thomson Reuters)

Disclaimer

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