January 14, 2020
Aurora Cannabis can’t catch a break. Troubles that hounded the Canadian cannabis company in 2019 have followed it into a new decade ー and experts say they expect things to get worse before they get better.
"When you consider that their [selling, general and administrative expenses] alone is dwarfing their gross profit and they are burning excess amounts of cash and they have to be EBITDA positive by Q3 of this year, essentially September of 2020, which we don't think is going to happen, we think they have big problems," said Gordon Johnson, founder and CEO of GLJ Research.
Johnson initiated coverage of Aurora ($ACB) in December with a "sell" rating and a bold price target of $0. His argument was that Aurora ー strapped for cash with a thinly-stretched balance sheet ー won’t be able to fulfill covenants on a CA$360 million ($275.6 million USD) credit facility, negotiated with Bank of Montreal in September.
If as Johnson proposed, Aurora's equity has no value, why cover it at all? Shorting.
"If you think the stock is worth $0, at any price there is 100 percent downside. So that is quite the return for anyone who is interested in shorting stocks," he said.
Johnson’s take on the company might be more extreme than other analysts in the space, but they share his concern. Christopher Carey, research analyst at Bank of America Global Research rated Aurora “underperform” and assigned a price outlook of $1.
“With [balance sheet] risks to remain a core investment thesis in 2020 in our view, and lingering uncertainty especially on financial covenants, we struggle to envision a scenario where shares have sustainable support,” Carey wrote in a note published last week.
2019 was a tough year for cannabis stocks, but especially for Aurora. It lost charismatic cheerleader Chief Corporate Officer Cam Battley, who stepped down in December, and saw its stock fall some 80 percent from a March high. Like many other Canadian cannabis companies, Aurora bet big on Canada’s recreational cannabis rollout. When sales began to disappoint, Aurora over-promised and under-delivered time and time again. With losses mounting, cash dwindling, and the Bank of Montreal deal set to mature in September 2021, Aurora has begun restructuring and selling assets.
The company halted construction on a greenhouse in Denmark and an Alberta facility in November and put a cultivation facility it acquired through its 2018 acquisition of MedReleaf on the market for CA$21.5 million ($17 million USD) in January. The move came as a surprise to investors, which analysts also found discouraging.
"We are also discouraged with the visibility of Aurora's strategy — investors were unaware Aurora was trying to sell Exeter (despite a facilities update on December 23, 2019) and are in the dark regarding dilution timing as Aurora uses its ATM equity facility," MKM's Bill Kirk wrote in a note in early January.
Furthermore, analysts aren’t convinced these cost-cutting measures or even the promise of selling higher-margin form factors like beverages, vapes, edibles during the second wave of Canadian legalization will be enough to rectify things. Many suspect the rollout of Cannabis 2.0 in Canada will be fraught with similar challenges seen during the previous year and that overall growth potential in the market is limited.
But whereas Johnson thinks Aurora has no equity value, some experts like Carey, envision a future for Aurora ー if and when it renegotiates its covenants.
“To be clear, we expect the covenants to be restructured, a big step in helping investor confidence. Once this and visibility on financial delivery improves (and valuation with it), we see an opportunity to return focus to ACB's key positive qualities,” he wrote.