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One Step Forward With Cost-Cuts, Two Steps Back As Revenue Falls In Aurora’s Path To Profit In Q3

Business Strategy & Outlook

Aurora cultivates and sells cannabis predominantly in Canada but also exports into the global medical market. Aurora considers itself a medical cannabis company first but has benefited from the legalization of recreational cannabis in Canada in 2018. Recreational now accounts for nearly 40% of gross sales, although this share is slightly lower than peers. The Canadian medical market is expected to grow slowly at roughly 1.5% as recreational legalization takes customers. Robust recreational growth of roughly 15% is forecasted, driven by the conversion of illicit-market consumers into the legal market and new cannabis consumers. Aurora has expanded its global medical exports, currently shipping to more than 20 countries. The global market looks lucrative, given higher realized prices and the growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Aurora. Continued growth in its medical exports has helped Aurora see volume and price growth even as its domestic market has struggled during pandemic lockdowns. Roughly 20% average annual growth is projected through 2031. 

The U.S. is envisioned to change federal law to recognize states’ choices on legality within their borders, unlocking the fastest-growing and largest potential cannabis market, which will estimatedly be more than 5 times larger than the Canadian market. At present, Aurora would not benefit from a change in U.S. federal law on THC cannabis, as its only exposure is through hemp-derived CBD products through its May 2020 acquisition of Reliva. Aurora is one of the few Canadian producers with no standing deals with a U.S. multistate operator, although it believes it would be able to draw an attractive partner should the law change. Aurora has not entered a major strategic partnership. This forces it to rely more heavily on equity market access while its peers can rely on the deep pockets of a large partner for capital. This raises the risk of massive equity dilution to avoid running out of cash. In fact, shares outstanding nearly doubled from March 2020 to March 2021.

Financial Strengths

Aurora’s financial health has been a lingering concern but is improving. At the end of its third quarter of fiscal 2022, the company had about CAD 334 million of convertible notes compared with a market capitalization of roughly CAD 700 million. The notes are due in 2024, so the company has some time. Subsequent to quarter-end, the company repurchased CAD 128 million of the notes funded with shares issued under its at-the-market equity program. Aurora continues to generate cash losses. This is particularly concerning because the company has limited capital markets access and no major strategic partner backing it. However, since announcing its restructuring program, the company has significantly reduced its cash burn and positive EBITDA is nearing. 

Aurora’s access to debt markets is limited. Consequently, the company has relied on equity offerings to fund its cash needs, leading to significant dilution for existing shareholders. In fact, shares roughly doubled from March 2020 to March 2021. Having sizable leverage while remaining unprofitable creates additional risk for Aurora. This creates a wide range of possible valuation outcomes for shares amid the significant risk of value destruction. With Aurora shares having fallen over the last several months along with the broader cannabis sector, any share issuances would be even more dilutive.

Bulls Say

  • Aurora has rationalized its production facilities and head count, significantly reducing its cash burn. 
  • Cannabis cultivation is complicated, including challenging operational ramp-ups and optimization. Aurora’s strategic focus on its cultivation operations will help it achieve lower production costs than peers. 
  • Aurora’s international exposure can deliver high margin sales to help its path to profitability

Company Description

Aurora Cannabis, headquartered in Edmonton, Canada, cultivates and sells medicinal and recreational cannabis through a portfolio of brands that include Aurora, CanniMed, Daily Special, MedReleaf, and San Rafael ’71. Although the company primarily operates in Canada, it has expanded internationally through medical cannabis exporting agreements or cultivation facilities in more than 20 countries.

(Source: Morningstar)

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