The money Aurora Cannabis burns is hard

Aurora Cannabis (ACB) burns more money than its customers burn cannabis.

The company announced a $ 125 million offer that brought the shares down by more than 20%. This comes on the heels of the company saying that the revenues will go down.

The news prompted Stifel analyst Andrew Carter to give the stock a “sell” rating. He wrote: “We were puzzled when the company announced that it had exhausted its ATM facility at the end of October. The implicit cash consumption in the first 37 days of the quarter (C $ 83 million with just over C $ 20 million in unique items) suggests liquidity. needs outside the scope of our expectations with ATM depleting after fourth quarter earnings at around C $ 6.40 per share now seemingly pragmatic. “

The analyst suggested that the offer involved a sense of urgency. It now has a target price of C $ 6.50. Its breakdown is as follows: C $ 308 million in cash, C $ 31 million for inventories, C $ 444 million for goods and equipment, C $ 150 million for intellectual property, C $ 240 million for the Canadian medical platform and C $ 70 million for the German distribution company. “We are deducting this total of C $ 1.2 billion in liquidation value against almost C $ 600 million in liabilities,” he wrote. His sum of the parts analysis implies a value of CAN $ 4 per share.

Carter now estimates sales for fiscal 2021 to be C $ 309 million, compared to C $ 326 million. Fiscal 2022 sales are now estimated at C $ 435 million, down from the previous estimate of C $ 462 million. He cautioned by assuming that Aurora keeps pace with its competition, as competing in Canada becomes an expensive business. Keep in mind that the Canadian market is growing, but Aurora’s revenues, while plentiful, are declining.

Cantor Fitzgerald remains neutral

Cantor Fitzgerald maintains his’ neutral ‘rating on Aurora and analyst Pablo Zuanic wrote:’ Despite the stock swings over the past few days, we are only changing our 12-month PT to CA $ 12 from CA $ 13 ( due to the higher number of shares), taking 20x off our future EBITDA estimates (December 2021 to November 2022). Ex-guidance / expectations, in our opinion, the September quarter impression disappointed in several ways: lower sales in domestic rec / med, with a net share of rec loss, margins deteriorated and consumption of liquidity has also deteriorated. “

His arithmetic for the valuation was as follows: “Taking the stock offering price of US $ 125 million to US $ 7.50 (10% reduction at Tuesday close), 177 million shares and new pro forma net debt of $ 41m, ACB is trading at 6.7x EV / current sales compared to 7x for TLRY and 8x for APHA and VFF (GIC-based stocks like CRON and WEED are trading at 40x and 19x ). Despite the volatility, we believe the relative valuation leaves little downside. “

Lack of knowledge of the market

In September, Aurora noted that its medical cannabis business had remained stable, but its retail business continued to struggle. The company focused its efforts on the value brand Daily Special. Chief Financial Officer Glen Ibbott said: “Special of the day, our value brand accounted for 62% of total consumer net income from flowers in the quarter, up from 35% in the third quarter. This is the main driver. impacting the decrease in our average selling price per gram of dried cannabis flower. “

The company also noted that once it started to focus on a value-added brand, so did its competitors. Ibbott added: “I think the company was a bit distracted by the success they saw with this discount offer which was the Daily Special, which kind of delayed other endpoints such as the steam and pre-rolls. There is a lot of growth in the category and then everyone kept piling up and because there with such addiction to this discount business and in many different ways, to the times on the gross side, on the sales side, on the trade marketing side when it was quite you know pressed by competitive price pressure, it became difficult to pivot. “

Aurora is now focusing on premium products since the value side collapsed. However, shifting the focus from cheap cannabis to something that regular customers are willing to spend a lot of money on isn’t that simple. Aurora CEO Miguel Martin said during the company’s earnings call: “What I can tell you is you’re going to see a big focus on our premium flower and then we have great brands as you know Whistler, San Raf and Aurora. First and foremost it takes a little time to find the premium brands that we have chosen. Second, we had some very substantial conversations and successful with our business partners on this. And third, we need to look a certain way, to better articulate on the format and packaging, and these things take a little longer than just flipping a switch and to say that we care about San Raf, Whistler and Aurora. “

Although the premium market is lucrative, it is a small group of consumers. A regular cannabis user who visits a dispensary two to three times a month begins to make a price decision when choosing a product. Often the choice is for the cheapest product.