Aurora Cannabis Inc

Aurora Cannabis Inc (TSX: ACB), is a Canadian company which cultivates and sells medicinal and recreational cannabis through a portfolio of brands. Although the company primarily operates in Canada, it has expanded internationally in more than 20 countries.

Key highlights 

• Growing cannabis market opportunity: In the Canadian consumer market as a whole, the firm has developed one of the top market positions. In the longer term, it believes that the growing success of medicinal cannabis regimes throughout the world would lead to more adult-use consumer markets being legalized. Consumer demand for goods containing CBD produced from hemp plants is expected to rise in the future years, according to the company. The business expects consolidated Canadian retail revenues to reach approximately CAD 8.0 billion in the next three years.
  

Source: Company 

• Expanding its brand’s San Rafael '71 portfolio: Recently, the company launched three new proprietary cultivars under its premium adult-use cannabis brand San Rafael '71. The business is delighted to satisfy the demands of its customers with the new San Rafael '71 strains. Starting in July, these new product options would be available for purchase across Canada. We think that releasing new items to the market is beneficial to the firm since it would generate more revenue flows and attract new consumers.
  

• Renewed its agreement with Grow Group PLC: Grow Group PLC, a biopharmaceutical company focused on expanding its access to cannabis-based medicines in the United Kingdom. ACB has signed a two-year market access services deal with the company, extending their long-standing strategic collaboration. To meet the requirements of patients, the firm is devoted to offer legal access to high-quality pharmaceutical-grade medicinal cannabis to address the needs of the growing European medical cannabis market.
  

• Completes 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.        

Financial overview of Q3 2021 

Source: Company Report 

• The company posted lower revenue at CAD 1 million against CAD 73.5 million in the previous corresponding period. The drop in total revenue was mainly due to lower performance from consumer cannabis net revenue and lower average net selling price of dried cannabis which fell 23%.
• On the back of higher cost of goods sold due to fair value inventory impairment charges, the company registered gross loss of CAD 85.4 million against a profit of CAD 19.6 million in pcp.
• Although the company curtailed its operating expenses to CAD 57.4 million against CAD 103 million in pcp, still it recorded operating loss of CAD 142.9 million against a loss of CAD 83.4 million in pcp.
• Net loss for the reported period stood at CAD 164.56 million against CAD 139.3 million in pcp.

Risks associated with investment

The company operate in a highly regulated business and any failure or significant delay in obtaining applicable regulatory approvals could adversely affect the ability to conduct its business. Additionally, change in the laws, regulations, and guidelines that impacts the business may cause adverse effects on its operations.

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

The adult-use category in Canada faced problems throughout the quarter. Aurora's extensively diversified business model, which balances local medical, foreign medical, and adult-use platforms, is becoming increasingly important. Despite this, it had the greatest domestic medical cannabis outcomes and the best foreign medical cannabis results of any Canadian LP throughout the era. The firm sees a significant potential to cater to the Canadian retail sales of cannabis, which is expected to reach about CAD 800 million in the next three years. Furthermore, we feel that expanding the brand's portfolio by launching new items is beneficial to the firm since it would generate more revenue flows and attract more new consumers. Based on technical analysis, the stock has support at CAD 9.3 level. Therefore, based on the rationales discussed above and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 11.47 on June 28, 2021. We have considered Canopy Growth Corp, Tilray Inc, OrganiGram Holdings Inc, etc., 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 or if the price closes below the support level.

One-Year Technical Price Chart (as on June 28, 2021). Analysis by Kalkine Group 

Exchange Income Corp

Exchange Income Corp (TSX: EIF) is a diversified acquisition-oriented corporation focused on opportunities in two sectors, aerospace, aviation services and equipment, and manufacturing. The business plan of the corporation is to invest in profitable, well-established companies with strong cash flows operating in niche markets.

Key Highlights 

• An income play: The company has a long history of dividend payout, demonstrating that its operation is resilient and has generated consistent cash flows over time. Recently, the board of directors approved a monthly dividend of CAD0.19 per share, which will be paid on July 15, 2021. Moreover, at the closing price of CAD 39.24 on June 28, 2021, the stock was delivering a yield of 5.81%, which is encouraging looking at the current market dynamics and interest rates.   
  

• Increase in free cash flow: The Free Cash Flow generated by the company during the period stood at CAD 41.6 million, an increase of CAD 2.9 million, or 7% over the comparative period. The rise in free cash flow was primarily due to an increase in EBITDA by CAD 6.9 million, partially offset by higher current taxes.

• Industry beating margins: Despite recent limitations imposed as a result of the pandemic, which had a significant impact on the aviation sector, the company was able to overcome these obstacles, thanks to sound management and business resilience. It also outperformed industry margins on a number of fronts, which is commendable.
  

Financial overview of Q1 2021 (In thousands of Canadian dollars)

Source: Company

• On a consolidated basis in Q1 2021, the company generated revenue of CAD 300.7 million, a decrease of CAD 6.2 million, or 2% against CAD 306.9 million in the previous corresponding period. A decrease of CAD 17.5 million in the Aerospace & Aviation segment was partially offset by an increase of CAD 11.3 million in the Manufacturing segment.
• The company managed to narrow its operating expenses at CAD 236.6 million in Q1 2021 compared to CAD 249.7 million in pcp.
• EBT for the reported period stood at CAD 10.4 million against the loss of CAD 8.0 million in the previous corresponding period.
• On the back of robust operating profit and minimized expenses the company reported a net income of CAD7.1 million compared to a loss of CAD 5.2 million in pcp
  

Risks associated with investment

A major part of the revenue is being derived from the aviation segment, and the recent restrictions imposed on account of the pandemic has caused a tremendous impact on the aviation segment. Continued pain in the aviation sector might hinder the group’s performance. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

While regional travel restrictions and concurrent declines in passenger traffic continue to be a challenge for scheduled airline services, there are encouraging signs in the segment, and the company continued to achieve consistent results in aerospace operations by emphasizing dependable delivery of long-term contracts and successfully mitigating pandemic impacts on its operations. Increased demand in the United States and other parts of the world, such as Africa, has boosted activity at Regional One, resulting in sequentially greater revenue for both parts sales and leasing revenue in the first quarter. We expect this trend to continue through 2021, as demand for Regional One’s Service is driven by rising demand and greater maintenance activities at airlines. Based on the technical analysis, the stock has support at CAD 33.0 level. Strong liquidity, free cash flows, industry-leading margins, and a high dividend yield led us to suggest a “Speculative buy” rating on the stock at the closing price of CAD 39.24 as on June 28, 2021. We have considered Cargojet Inc, Chorus Aviation Inc, Heroux Devtek Inc, etc., 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 or if the price closes below the support level.

One-Year Technical Price Chart (as on June 28, 2021). 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.