It has been a bleak year so far for Canadian cannabis producer Aurora Cannabis (ACB), with shares crashing by a hefty 70%. The company will have an opportunity to reverse course when it releases second-quarter results after the market closes today.
Ahead of the print, Jefferies analyst Owen Bennett has an idea what to expect.
Two weeks ago, Aurora released an update on the quarter’s events and guided for a sequential drop in cannabis net sales and at the same time pushed back its target to be EBITDA positive from 1Q21 to 2Q21. However, the company also reduced its SG&A (selling, general and administrative) expense, of which Bennett notes the “progress on costs has been impressive.” Yet the analyst also argues Aurora is not out of the woods just yet with its liquidity problems, which in the near-term remain a risk “especially if the company is to continue to invest behind its top line strength like it should.”
“The problem for ACB has been its sizeable cost base, and not only the liquidity issues that come with this, but also communication around this which has damaged its credibility,” Bennett said. “To this, we don’t think anyone can dispute its progress in bringing costs in to more sustainable levels has not been impressive (the current quarterly run rate of cC$40mn compares over C$100mn in Q2 FY20). If it can maintain the top line strength, then it should not be long until bottom line contribution starts to match.”
So, with “liquidity risk now much better reflected in the valuation” Bennett upgraded his rating on ACB from Underperform (i.e. Sell) to Hold. That said, Bennett also expects the company to make full use of its ATM and believes additional equity raises are a possibility. Therefore, the price target is slashed from C$14 ($10.53) to C$8.7 ($6.54), implying an 11% downside from current levels. (To watch Bennett’s track record, click here)
Rating wise, it is a similar story amongst Bennett’s colleagues. The stock has a Hold consensus rating based on 2 Buys and 8 Holds. However, the $10.92 average price target implies shares will rise by a hefty 50% over the next 12 months. (See ACB stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.