Aurora Cannabis Inc.

Aurora Cannabis (TSX: ACB) is a cannabis-based company which serves both the medical and consumer markets. The company has headquartered in Edmonton, Alberta, and the group is a pioneer in global cannabis dedicated to helping people improve their lives.

Recently, the company announced that Miguel Martin had been appointed Chief Commercial Officer of Aurora. He will replace Darren Karasiuk who has held this position at Aurora since February 2019.

Q3FY20 Financial Highlights: ACB announced its third-quarter results, wherein the company posted net revenue of CAD 75.52 million, as compared to CAD 65.145 million in the previous corresponding period (pcp). The growth was due to an increase in consumer cannabis net revenue, coupled with an improvement in medical cannabis net revenue. Gross profit before fair value adjustments stood lower at CAD 31.888 million as compared to CAD 36.231 million in Q3FY19, due to a significant surge in the cost of goods sold. Gross profit stood lower at CAD 27.405 million against CAD 52.622 million in pcp. Total expense, however, stood lower at CAD 110.973 million, as compared to CAD 130.239 million due to a decline in share-based compensation expense. Meanwhile, the company reported a higher loss from operations at CAD 83.568 million, as compared to CAD 77.617 million in the previous corresponding quarter. Net loss stood at CAD 137.363 million, lower than CAD 160.195 million in pcp.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Products are new to the consumers and may not receive the acceptability from the consumer or might not meet the consumer requirement. Further, any regulatory changes related to cannabis would hamper the company’s operations.

Valuation Methodology (Illustrative): EV/Sales Based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of ACB plunged ~70% so far this year due to weak investors’ sentiment. The company reported an improvement in medical and consumer cannabis net revenue, which is a key positive and promises for future growth. Increase in the usage of dried cannabis products is like to contribute to the company’s performance. The group is expecting its Q4FY20 revenue in the range of CAD 70 million to CAD 72 million, which would include CAD 66 million to CAD 68 million as cannabis net revenue. Further, the group is likely to record ~CAD 1.8 billion as goodwill impairment charges in the last quarter of the current financial year. The company announced a reduction in the Adjusted EBITDA milestones required for the trailing twelve-month period ending June 30, 2021 from CAD 51 million to CAD 20 million, including delaying the requirement to generate positive Adjusted EBITDA to Q2, which is not an encouraging sign. Further, the group announced a reduction in the size of the revolving facility from CAD 43 million to CAD 15 million to better align with the company’s average receivables balance and to reduce unnecessary fees. However, the above mover might result in a liquidity crunch in a tough time. We have valued the stock using EV/Sales based relative valuation and arrived at a target price offering low single-digit upside. We have considered Hexo Corp, Cronos Group Inc and Aphria Inc etc., as a peer group for comparison purpose. Hence, we recommend a ‘Watch’ stance in the stock at the closing price of CAD 9.92 on September 8, 2020.

ACB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

HEXO Corp.

HEXO Corp (TSX: HEXO) is a consumer-packaged goods cannabis company which operates and distributes easy-to-use and customer-friendly products to serve the Canadian cannabis market.

Key Highlights:

• Recently, the company announced that it had completed previously announced at-the-market equity program. The group sold 33,921,979 common shares between June 18, 2020 and July 31, 2020. Gross proceeds from the transactions stood at CAD 34.497 million, which would be utilized for working capital requirements, capital expenditures and debt repayments.
• The company launched its line of vape products to both adult-use and medical consumers, across Canada. These products are expected to enhance the group’s market presence, which is likely to improve the company’s business prospects.

Q3FY20 Financial Highlights: HEXO announced its quarterly results, wherein the company posted revenue at CAD 30.895 million, reporting an exuberant growth from CAD 15.93 million in the previous corresponding period (pcp). The increase in revenue was driven by robust growth from the adult-use segment, while a decline in the medical revenue remained a drag. Net revenue from the sale of good stood at CAD 22.078 million as compared to CAD 12.956 million in pcp. Gross margin stood significantly lower at CAD 5.730 million, against CAD 21.832 million in Q3FY19. Operating expenses came in higher during the quarter at CAD 26.786 million as compared to CAD 24.056 million in pcp. Net loss, during the quarter, widened to CAD 21.056 million as compared to CAD 2.224 million in the previous corresponding quarter.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The cannabis products are relatively new to the customers, and the company might witness setbacks due to change in trend, higher input costs, price competition, Government’s regulation etc. which might dampen the company’s growth prospects.

Valuation Methodology (Illustrative): EV/Sales Based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of HEXO tumbled in the recent past and corrected ~57% so far this year amid volatility in the equity market. The company is catering to adult-use and medical-use products, which is a growing market and the company reported a 30% sequential growth and extended its distribution across the Canadian market, which is a key positive. The company has shown strong growth within the ‘adult-use-segment’, while the medical and the wholesale segments showed tepid responses, which is a key challenge for the company. The adult-use market characterized by large-scale licensed producers and continuously evolving Canadian cannabis economy’s supply and demand conditions. The group announced an expanded partnership with Molson Coors to explore US CBD market in Colorado, which is encouraging. The cannabis market is growing in Canada, and due to the increase in the number of players, we expect a price competition which is likely to dampen the overall margin of the businesses. We have valued the stock using EV/Sales based relative valuation and arrived at a target price offering low single-digit upside. We have considered Aurora Cannabis Inc, OrganiGram Holdings Inc and Aphria Inc etc., as a peer group for comparison purpose. Hence, considering the aforementioned fact, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 0.88 on September 08, 2020.

HEXO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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