Aurora Cannabis Inc.’s Aggressive Expansion Should Reward Investors

Aurora Cannabis Inc. (TSX:ACB) has been expanding its presence via carefully-selected Mergers & Acquisitions, which have already begun bearing fruit

SmallCapPower | November 13, 2018: Aurora Cannabis Inc. (TSX:ACB) is one of the global cannabis leaders, with sales and operations across five continents, and a funded capacity of over 500,000 kg per annum. Vertically integrated and horizontally diversified across cannabis value chain, Aurora Cannabis is involved in several areas – facility engineering and design, cannabis breeding and genetics research, cannabis and hemp production, cannabis derivatives, high value-add product development, home cultivation, wholesale and retail distribution.

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Aurora Cannabis follows an efficient production strategy based on purpose-built facilities having advanced technologies, automation and customization, resulting in large-scale production of high-quality product at ultra-low costs. All the facilities are built to comply with EU GMP standards – first production facility, MedReleaf’s Markham facility and wholly-owned European medical cannabis distributor Aurora Deutschland (formerly Pedanios), have achieved this certification.

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Aurora Cannabis has achieved rapid growth through organic expansion as well as successful execution of strategic M&A, which includes companies such as MedReleaf, CanvasRX, Peloton Pharmaceutical, Aurora Deutschland (formerly Pedanios), H2 Biopharma, Urban Cultivator, BC Northern Lights, Larssen Greenhouses, CanniMed Therapeutics, Anandia Labs, HotHouse Consulting, Agropro, Borela, and the pending acquisition of ICC Labs. The Company also has strategic associations with a range of leading innovators, including The Green Organic Dutchman Holdings Ltd. (TSX:TGOD), Radient Technologies Inc. (TSXV:RTI), Hempco Food and Fiber Inc. (TSXV:HEMP), Cann Group Ltd. (ASX:CAN), Micron Waste Technologies Inc. (CSE:MWM), Choom Holdings Inc. (CSE:CHOO), Namaste Technologies Inc. (TSXV:N), Evio Beauty Group (private), Wagner Dimas (private), CTT Pharmaceuticals (OTCC:CTTH), and Alcanna Inc. (TSX:CLIQ).

Investment thesis

  • Strong distribution network
  • Industry leading production capacity
  • Prominent acquisition portfolio

Strong distribution network

Aurora Cannabis has built extensive distribution channels across Canada and internationally. The Company has a presence in nine jurisdictions globally, excluding Canada, namely Germany, South Africa, Australia, European Union, Denmark, Malta, Italy, Brazil, and Cayman Islands. On the domestic front, Aurora Cannabis has entered into agreements with PharmaChoice, Pharmasave and Shoppers Drug Mart for the distribution, sale and marketing of medical cannabis products through their respective networks of pharmacies, subject to Health Canada approval. Such strong collaborations will bolster distribution across the Canadian landscape. On the international front, Aurora incorporated Aurora Europe GmbH, and other local subsidiaries to establish a solid distribution infrastructure. It acquired Pedanios (now Aurora Deutschland), a prominent wholesale importer, exporter and distributor of medical cannabis in E.U. in May 2017.  

The Company expects the number of distributors to grow substantially going forward. Further, in partnership will Alcanna, Aurora Cannabis has created state-of-the-art retail stores to provide consumers an immersive retail experience. The retail stores will feature a variety of brands, including Aurora, MedReleaf and CanniMed as well as a selection of products from other Canadian Licensed Producers. Alcanna is one of the largest private sector retailers of alcohol in North America, owning and operating 229 locations in Alberta, B.C. and Alaska. Alcanna will build, own and operate the new cannabis stores, leveraging its experience and expertise as a responsible retailer of controlled substances. Alcanna intends to open 37 stores, starting October 17, 2018. To further enhance the distribution network, Aurora Cannabis has created CanvasRx, a leading network of cannabis counseling and outreach centers assisting over 42,200 patients.

Industry leading production capacity

Aurora Cannabis has become the global leader in production of medical marijuana, with a funded capacity of 570,000 kg per annum. It has a total of 11 facilities worldwide with a production footprint of ~4.5 million sq.ft. Large-scale operations drive economies of scales, driving down costs and increasing margins. Aurora Cannabis is well positioned to serve international & domestic medical markets and the emerging Canadian recreational-use market by producing high-quality, low-cost cannabis products. In FY 2018, Aurora Cannabis produced 5.6 million grams of cannabis and sold 5 million grams at an average price of cost of $1.89. The average cost of production per gram amounted $1.62. Aurora posted 65% gross margins for FY 2018 and a healthy bottom line of $69.2 million. The Company expects once the Aurora Sky facility is up to full capacity the production costs at this facility will fall below $1 per gram.  

Prominent acquisition portfolio

Aurora Cannabis has been expanding its presence via carefully-selected Mergers & Acquisitions, which have already begun bearing fruit. Aurora invested a total of $326.6 million in inorganic growth and the fair market value of these investments has reached $698.6 million as of June 30, 2018. Aurora Cannabis has a total of 15 acquisitions and 12 strategic investments in fields such as facility building, cultivation & extraction, plant science & products R&D, distribution and consumer engagement. Despite investing considerably in the cannabis space, Aurora Cannabis has a strong balance sheet with current assets worth $215 million (as of June 2018), which can be utilized for furthering the Company’s position in the cannabis space. Effective integration of these acquisitions would be key for Aurora’s success.

Outlook and valuation

With innovation and advanced R&D Aurora Cannabis, with its massive global distribution network, will likely become a leader in the legal cannabis industry. Benefiting both from organic and inorganic growth, Aurora has paved the way to become one of the most valuable global cannabis brands. Currently, Aurora Cannabis stock trades at a market capitalization of $8.8 billion with a price-to-book ratio of 3.2x and a price-to-sales ratio of 153.4x.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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