Aurora Cannabis Inc. (TSX:ACB) does look appealing if only as an acquisition target
SmallCapPower | December 23, 2019: GLJ Research analyst Gordon Johnson initiated coverage of Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB) stock on recently with a Sell rating and zero price target. Yes, you read that correctly, he thinks the Company is effectively worthless.
“Our view that ACB’s equity holds no value is driven by our work, which implies the Company is facing a liquidity crunch that will, ultimately, risk its status as a going concern,” Mr. Johnson said. The analyst believes Aurora Cannabis’ balance sheet is stretched to its limit and the Company is quickly running out of cash.
Aurora Cannabis, he said, has made moves that have increased the risk levels for its investors, including: putting its operating assets up as collateral for debt it will have trouble paying back; altering the terms of its $230 million March 2020 convertible debt terms and; failing to partner up with more established industry players. The GLJ Research analyst suggests Aurora Cannabis will run out of money before July 1, 2020, if it is not able to raise more funds.
Gordon Johnson’s outlook is dire yet, at least operationally, Aurora Cannabis does look appealing if only as an acquisition target. First, during its most recently-reported quarter (Q1/20) ACB has maintained some of the best gross margins in the industry for the third quarter in a row, with only Supreme Cannabis (62%, Q1/20) having better gross margins. Aurora Cannabis also reported cash cost per gram of $0.85, down 25%, with cash cost to sell of $1.15, which also improved by 22% during the quarter.
As well, revenue for ACB is likely to improve in 2020 due to more retail outlets expected to open in Ontario in addition to the rollout of cannabis edible products in Canada (Cannabis 2.0). It is also noteworthy that during Q1, Aurora Cannabis Inc’s medical patient base expanded 8% sequentially to 91,116. The Company announced that it has temporarily ceased construction at its Aurora Sky facility in Alberta, as well as the Aurora Nordic 2 facility in Denmark, with both closures expected to save ACB approximately $200 million in capital expenditures during the next 12 to 18 months.
A big positive is that Aurora Cannabis has a more extensive international presence than any other cannabis company, with cultivation, research, export, or partnerships established in 25 countries. And, Reuters reported recently that ACB became the first major Canadian company to sell edibles and vapes for medical use, which should fatten its margins and eventually lead to sales in the much larger European medical market.
Indeed, Aurora Cannabis will have some difficult decisions to make during the next year. A corporate tie up would make sense, especially involving Big Pharma given the recent advancement with its medical cannabis business. Aurora was rumoured to have been in talks with Coca-Cola in the past and given that billionaire activist investor Nelson Peltz became a strategic advisor for ACB earlier this year, a potential partnership in 2020 seems more and more likely.
Shares of Aurora Cannabis have slid about 15% during the past week since the GLJ Research report was released.
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