Following an article in Barron’s, we compare Aurora Cannabis Inc.’s (TSX:ACB) path to profitability with three of the other large cannabis companies
SmallCapPower | July 9, 2019: On June 24, 2019, Barron’s published an article asserting that Aurora Cannabis Could Be One of the First Marijuana Sellers to Turn a Profit. The article states that Aurora could turn a profit as soon as Q4/19, according to Cowen and Company analyst Vivien Azer. Today, we will be providing our own take on this article, comparing Aurora’s path to profitability with three of the other large cannabis companies.
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We compared four of the Top-10 Canadian cannabis companies: Aurora Cannabis Inc. (TSX:ACB), Canopy Growth Corporation (TSX:WEED), HEXO Corporation (TSX:HEXO), and Organigram Holdings Inc. (TSXV:OGI), to gain some insight into how these companies are trending towards profitability. We took earnings before interest, taxes, depreciation, and amortization (EBITDA) of these companies over the past four quarters. We then adjusted it by adding back changes in fair value of biological assets and stock-based compensation. Looking at the performance of these companies over the past four quarters, we can identify which companies are trending towards profitability:
Aurora Cannabis Adjusted EBITDA Trend
Source: SmallCapPower, Company Reports
Canopy Growth Adjusted EBITDA Trend
Source: SmallCapPower, Company Reports
HEXO Corporation Adjusted EBITDA Trend
Source: SmallCapPower, Company Reports
OrganiGram Holdings Adjusted EBITDA Trend
Source: SmallCapPower, Company Reports
As evident by the graph above, Organigram Holdings is the only Top-10 cultivator in our group that has managed to reach a positive adjusted EBITDA. This can be attributed to the fact that Organigram Holdings is known for being one the most operationally-efficient cannabis companies. This is demonstrated by its impressive domestic yield per square foot, which sits at ~155 grams per square foot, relative to an industry average of ~105 grams per square foot.
While Aurora Cannabis and Canopy Growth are both trending towards a positive adjusted EBITDA, it is evident that HEXO is the closest amongst the remaining three, posting an adjusted EBITDA of ($1.9M) in its last quarter.
Aurora Cannabis posted an adjusted EBITDA of ($22.9M), ($35.4M), and ($47M) for Q3/19, Q2/19 and Q1/19, respectively. These numbers represent an almost linear relationship, meaning that Aurora has realized consistent improvements in moving towards profitability on a basis of its adjusted EBITDA. If this trend remains consistent, Aurora should realize positive adjusted EBITDA by Q1/20. However, there are various catalysts that could help Aurora Cannabis achieve positive adjusted EBITDA as soon as Q4/19. With Aurora’s production ramping up, ACB continues to scale up manufacturing capacity, with innovation and technologies aimed to reducing time from harvest to market. Increasing processing, packaging, and delivery efficiencies in Q4 is expected to accelerate the availability of product. Supply to Europe and other international markets is expected to increase as more of Aurora’s production facilities receive EU GMP certification. Recently, the Bradford facility has undergone an audit to obtain EU GMP certification. In Q3/19, Aurora commenced exporting full spectrum cannabis extracts in Germany. Management anticipates these sales will contribute to growth, given the higher margins in extracts. With Aurora Sky now operating at full capacity, the Company also anticipates continued reduction in production and manufacturing costs, allowing cash costs per gram to continue to trend lower. ACB believes that it can achieve an average cash cost per gram below $1 at its Sky Class facilities.
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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