Aurora Cannabis

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

Key Highlights:

• Promising Long-term goals: In order to create Long-Term Value Creation, the company is focusing on generating free cash flow and margin accretive products & categories. The company would also prioritize on increasing the operational flexibility through shifting to a more variable cost structure, leveraging outsourcing etc.
• Positive macros: The Adult Use Cannabis market in Canada has remained favorable in the recent past, while the momentum is expected to continue in the coming years, driven by the increase in product acceptability. Moreover, the legalization of adult-use consumer markets across Uruguay and other countries is expected to boost the company’s sales volumes in the coming years. Notably, ~50 countries have accepted cannabis products for medical purposes. The opportunity in the Cannabis space remains attractive, and the company is highly poised to take advantage of the added demand.                          
• Balance Sheet Restructuring: The business has completed the process of restructuring its balance sheet by repaying the whole amount of roughly CAD 89 million on its restated credit facility, including accrued interest. The Company's pro forma cash position as of May 31, 2021, after giving effect to the repayment, was approximately CAD 430 million.
• Management Update: The company recently announced the appointment of Theresa Firestone to the Company's Board of Directors.
  

Q3FY21 Financial Highlights:

• ACB announces its quarterly result, wherein the company posted net revenue of CAD 55.161 million, lower than CAD 73.541 million in pcp.
• The company reported a gross loss of CAD 85.461 million, as compared to a gross profit of CAD 19.645 million in pcp. This was primarily due to a higher cost of sales (CAD 127.545 million, as compared to CAD 50.656 million in pcp.
• Loss from operations stood at CAD 142.956 million, as compared to a loss of CAD 83.426 million in pcp. Input costs like general and administration expenses, sales and marketing expenses and research and development stood lower during the quarter.
• Net loss widened to CAD 164.650 million, from CAD 139.339 million in pcp.

Source: Company Report

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.

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation:

The company would realign its production base and would focus on high-value cultivation and derivative product production. With the offering of consumer-focused innovative products, we expect a boost in its upcoming margins. Additionally, the acquisition of Reliva, LLC, a U.S. company based in Massachusetts, which focuses on the distribution and market of hemp-derived CBD products, has added to the company’s business prospects from the US region as a growing addressable market can be easily catered. Hence, considering the aforesaid facts and valuation, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 8.46 on August 18, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 18, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Delta 9 Cannabis Inc

Delta 9 Cannabis Inc (TSX: DN), is a Canada-based company engaged in Biotechnology & Medical Research. The principal activities of the Company are the production, storage and sale of medical marijuana.

Key highlights 

• Increasing retail stores: The organization is making steady strides against its target of opening up to 20 Delta 9 Cannabis specialty stores throughout the Prairie provinces this year and has a long-term vision of opening many more Delta 9 branded retail stores across Canada. The group also announced the grand opening of three more cannabis retail stores since the beginning of 2021 and now have 12 retail stores in total with nine in Manitoba, two in Alberta and one in Saskatchewan.
• Focusing on medical cannabis market: The company derives a small portion of its revenues from the sale of medical cannabis products directly to patients who have received a medical document from their health care practitioner. The management expects that its recent introduction of oils and extract products into the company’s product offering would result in expanded revenue streams and provide a stronger value proposition for medical clients.
• Opportunity from recreational cannabis market: Management believes that the domestic market for recreational use cannabis presents a major growth opportunity for the Company over the next several years. Wholesale revenues from the sale of recreational use cannabis products are expected to make up a large component of the Company's overall business. In order to achieve growth in this market, management has entered into a number of significant supply agreements.
  

Financial overview of Q2 2021 in CAD

Source: Company

• In Q2 2021, the company reported higher revenue at CAD 16.7 million compared to CAD 13.0 million in the previous corresponding period. The rise was due to solid performance in all-business segments.
• On an account of increase in % cost of sales to revenue at 71% V/s 69% and after accounting for changes in the fair value of biological assets, the gross profit declined to CAD 4.8 million in Q2 2021, compared to CAD 5.1 million in pcp.
• In the reported period the company’s operating expenses increased marginally to CAD 5.6 million against CAD 5.3 million in pcp, as a result the group posted loss from operations of CAD 0.8 million against CAD 0.1 million in pcp.
• Primarily due to above stated reasons along higher finance cost, the company posted net loss of CAD 1.1 million in Q2 2021 against CAD 0.4 million in pcp.
  

Risks associated with investment

Several risk factors could impact the Company’s ability to execute its key strategies successfully and materially affect future events and financial performance. To name some of these risks are reliance on licenses and authorization, disruption in the supply chain, inability to sustain pricing and inventory models, etc.

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

Recently, the company presented its Q2 2021 financial numbers, where it reported record top line revenues and it was seventh consecutive quarter of positive Adjusted EBITDA. The group would continue its expansion within the retail store chain and market the Company’s price leader strategy to leverage customer acquisition at new and existing Company stores. Moreover, it focuses on building momentum in the cannabis wholesale segment through product expansion and enhancing its distribution across the markets. Furthermore, the management expects that its recent introduction of oils and extract products into the company’s product offering would result in expanded revenue streams and provide a stronger value proposition for medical clients. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 0.43 on August 18, 2021. We have considered Aytu Biopharma Inc, Nuvo Pharmaceuticals Inc, as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on August 18, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.