] Enlightenment: I am / we are long CGC, HEXO, OGRMF. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.
Aurora Cannabis: Justified – Aurora Cannabis Inc. (NYSE: ACB) Summary Aurora Cannabis (ACB) is the second most valuable cannabis company in the world and has retaken its second position in Canadian recreational market share after one strong march quarter. Operationally, Aurora grows both in Canada and internationally, including producing nearly twice as much cannabis in the quarter as last (15,590 kg, up 99% QoQ) and being one of only three companies to win a bid to grow medical cannabis in Germany . 19659005] Aurora earned $ 65.1 million in the March quarter, up 20% QoQ, but slightly below analyst estimates of $ 67.5 million. Gross margins crossed up to 56%, well ahead of larger peer Canopy Growths (NYSE: CGC) 22% gross margins last quarter. Aurora lost $ 76 million in EBITDA (ex-FV) in the quarter and had a free cash flow of $ 151 million, with about two-thirds of its losses due to investments. Perhaps because of this deficit, Aurora has filed to raise $ 400 million through a share dividend. In my opinion, this was a strong quarter for Aurora with good growth in both the Canadian cannabis recreational market (37% QoQ turnover) and the international medical market (40% QoQ turnover). These two markets are likely to be two of the biggest drivers for Aurora's growth in the next quarter, and Aurora's robust performance will provide investors with confidence the company will continue to work well in all its key markets. That said, value investors will still find little to like here. Aurora is trading about 17x its sales in 2020, based on analysts' estimates. This valuation means that Aurora will need many more strong quarters and continued growth in Canadian and Canadian Canadian and Canadian markets to justify the $ 13 billion price. For my part, I see Aurora as a reasonable investment in the Canadian sector in Canada, though not one of my favorite investments. Next quarter, Aurora expects to grow over 25,000 kilograms and cannabis and expects to earn its first adjusted EBITDA result on the back of growing sales. Aurora is also expected to announce US CBD plans and Nelson Peltz fueled partnerships with global companies over the next few months. Resources The Business Aurora Cannabis is a huge global cannabis company that intends to operate in any cannabis market where it is legally permitted. Aurora currently operates in 24 countries on five continents (America, Australia, Europe and Africa) and is based in Edmonton, Alberta, Canada. Among other things, Aurora has a quantity of 5,200,000 sqm of planned cultivation capacity, with approx. 1,300,000 sqm listed as fully operational. This gives Aurora a production capacity of approx. 150,000 kg / year of cannabis. This capacity will grow to 625,000 kilos / year by the end of 2020. Revenue : In March, Aurora Cannabis generated $ 65 million in net income (+ 20% QoQ, + 305% YoY), which was $ 2.4 million under analytic estimates of $ 67.5 million. Gross margins for the quarter increased slightly from 52% to 56%. The increase is due to a decrease in growth costs. In March, the cash cost of sales per gram fell by 21% QoQ to $ 2.05 / gram and the cash cost of producing per gram fell 26% QoQ to $ 1.42 / gram. This decline is due to economies of scale when Aurora's largest plant comes online. These facilities are expected to have a cash cost to produce below $ 1 / gram. Gross margins were already significantly ahead of Aurora's largest peer, Canopy Growth, but slightly behind the Nasdaq-bound organizational framework (OTCQX: OGRMF): Segments : Auror's net income of $ 65 million was $ 29 million US dollars (45%) from medical cannabis, $ 30 million (45%) from recreational cannabis in Canada, and $ 6 million (10%) from other sources. Aurora's revenue growth in the quarter was mainly due to increased recreational use of cannabis sales and growth, with recreational cannabis growing from $ 22 million (40%) last year. Aurora sold about 5,400 kilos of recreational cannabis at an average price of $ 5.48 / gram compared to 3.807 kilograms of $ 5.67 / gram last quarter. These sales place Aurora others among Canadian cannabis producers, behind Canopy Growth, but ahead of the organizational framework: # Company Rec. Cannabis Sales Quarter 1. Canopy Growth 8,288 kilograms (equivalents) 31. December 2018 2. Aurora ~ 5,400 pounds Mar 31, 2019 3. Organogram 4,658 kilograms 28. February 2019 4. Hexo (HEXO) 2.537 kilos Jan 31, 2019 ] Tilray (TLRY) ~ 1,900 kilos 31. March 2019 Top five recreational use of cannabis. Estimates by the author based on company registrations. All sales here are in kilo equivalents, since part of this sale is sold as cannabis oils and syringes. <img src = "https://static.seekingalpha.com/uploads/2019/5/15/48749491-15579508133065486.png" alt = "Aurora earns most of its revenue from dry cannabis, but international segment is growing rapidly. European sales and German supply gains : The vast majority of Aurorian cannabis sales are in the Canadian market but international medical cannabis sales are growing. During the March quarter, Aurora generated $ 4 million in sales from European medical cannabis sales, up 40% QoQ and 72% YoY, which is significantly faster than the Canadian cannabis market in Canada. Aurora Cannabis is a mature, scrupulously growing medical cannabis market. Aurora's European revenues are likely to increase in future quarters, and in April 2019, Aurora Cannabis was awarded the maximum number of parties in a German cannabis production bid. (APHA). At that price, Aurora will build a cultivation plant in Leuna, Germany. The construction is set to start this month and is expected to be completed within 12 months. This plant will produce a minimum of 4,000 kg / year of cannabis starting in October 2020. Oil and Extract Sales accounted for 18% of Auror's sales in March, as shown above. The majority of these sales (80%) are in the Canadian cannabis market in Canada, with the Canadian recreational market consuming the rest. These oil and extract sales are particularly lucrative for Aurora since they obtain an average price of $ 11.0 / gram (+ 10% QoQ) while dry cannabis sells for $ 5.86 / gram (-6% QoQ, due to a higher share of low-income activities sales in the quarter). Thanks to a recently approved Health Canada license for Auror's partner Radient Technologies, Aurora expects oil and extract sales to increase in the Aurora September quarter. Radient received a Health Canada license in February 2019 and began producing on a commercial scale in March 2019, according to applications. Operating expenses and profitability In March, Auror's sales and gross margins increased upwards. At the same time, the costs continued to mount, as Aurora continues its development. Auror's operating costs rose $ 18 million in the March quarter from $ 112 million to $ 130 million. Rising equity-based compensation contributed most to this increase, with Aurora paying $ 39 million in equity-based compensation (+ 104% QoQ, + 147% YoY). General and administrative expenses also increased from $ 7 million to $ 51 million, while sales and marketing expenses fell $ 6 million to $ 16 million. Profitability : Aurora is not profitable. In my opinion, the best estimates for tracking the profitability of the companies are EBITDA excluding fair value adjustments and looking at operating cash flow. (Fair value adjustments are non-cash adjustments required under Canadian accounting standards, but will not be used under US GAAP accounts. However, Tilray is the only major cannabis company to report its revenues using GAAP.) , Aurora EBITDA fell to a loss of $ 76 million from a loss of $ 65 million last year. This downturn was due to increased operating expenses, particularly the increase in dilutive $ 20 million share-based compensation. At the same time, Aurora's operating cash flow increased slightly from the last quarter and improved to a $ 55 million deficit from a $ 64 million deficit last time. The cash flow does not include share-based compensation, as there is no cash charge. Aurora also spent $ 97 million on its various infrastructure projects, building up to 5,200,000 sq.ft. cultivation footprint. Due to higher capital expenditures, Aurora's free cash flow was reduced to $ 151 million, from $ 142 million last year. Adjusted EBITDA : Aurora itself reports an adjusted EBITDA figure to track profitability. This figure is almost identical to EBITDA fair value, but Aurora's adjusted EBITDA excludes share-based compensation. Stock-based compensation does not cost Aurora money – so metric values can be useful to Aurora debtors, and look for Aurora to cover interest payments. Share-based compensation expands shareholders, making EBITDA a better metric for shareholders than adjusted EBITDA. In March, Aurora reported an adjusted EBITDA loss of $ 37 million, an improvement from last year's $ 46 million loss. However, if equity-based compensation is included, this quarterly adjusted EBITDA revenue of SBC is $ 76 million compared to $ 65 million last year. Why I ignore net income : Net income is not a good way to track cannabis on company earnings. Among other things, net income includes the non-cash fair value adjustments that I exclude from EBITDA and that Aurora itself excludes from adjusted EBITDA. For example, this quarter, these adjustments added $ 16 million to Aurora's net income, but there are non-cash gains based on the estimated carrying amount of holdings and biological assets rather than based on actual sales or costs. Source: Aurora Third Quarterly Accounts. The net result also includes a significant number of adjustments under operating income that are not cash and have little influence on Auror's business yesterday, today or tomorrow. For example, this quarter Aurora recorded a USD 102 million loss on derivative liabilities included in net income. This loss is a loss of paper that Aurora never has to pay. As explained in note 13 (c), this "loss" is related to Aurora's January 2019 issue of U $ 345 million in convertible notes. These notes have an interest rate of 5.5%, and Aurora expects to repay these notes in cash instead of in stock. However, every quarter of the Aurora must value these notes and record an unrealized loss or gain on derivative liability based on the change value of the equity conversion option embedded in the convertible notes. The change in value of these options is recorded in Aurora's income statement every quarter and is included in Aurora's net income. But Aurora will never have to pay this cost. These notes will either be repaid in cash – for U $ 345 million plus interest – or will be repaid in equity, with a conversion price of U $ 7.23 / share. The changed value of the equity conversion options in these notes (which is based on the changes in Aurora's share price and the volatility of Aurora's share price, among other things) will not be relevant to Aurora's business at any point in the future. Thus, the net profit of Aurora or for most cannabis companies includes a significant amount of noise, which I try to reduce by relying on more meaningful calculations such as EBITDA ex-FV and operational cash flow. Source: Aurora Cannabis at Sedar. Capital position : Auror's capital position is a bit complicated. Aurora had $ 317 million in cash. Including deposits, short-term investments and transferable securities (such as the Radient investment above), Aurora had $ 579 million in current cash. This was compensated by about $ 639 million in loans and convertible debt. However, this figure excludes the value of the equity conversion option embedded in Auror's convertible debt. It is in the $ 270 million balance, but this is after the $ 101 million increase is marked above (which is a non-cash cost). Without getting into too much detail, if Aurora pays its debt in cash, it will need about $ 810 million in repayment. Thus, Aurora puts a net debt position of around $ 230 million, but has enough money to pay in just over two quarters at their current free cash flow deficit of around $ 150 million / quarter. On May 14, Aurora filed a prospectus to raise U $ 400 million through the issue of shares in the company. This prospectus will allow one share offer any time over the next 25 months. Net dividends from this share dividend will be used to help Aurora continue to increase its global footprint. Given Aurora's free cash flow and net debt position, it would be surprising if Aurora pulled the trigger on an equity financing round over the next quarter or two. Market value / corporate value : From May 13, Aurora had 1.0 billion shares outstanding with an additional 160 million shares worth of options, warrants, limited share units and convertible debt. On a partially diluted basis at a price of $ 11.67 / share, this gives Aurora Cannabis a market value of around $ 13.1 billion. Aurora has a net debt position of $ 230 million and puts its business value at $ 13.3 billion. This makes Aurora the second most valuable cannabis company in the world for Canopy Growth: Company Market Cap $ 13 billion $ 19 billion $ 13 billion 3. Curaleaf (OTCPK: CURLF) $ 8 billion $ 8 billion 4. Cronos (CRON) $ 8 billion $ 6 billion $ 6 billion ] Tilray $ 7 billion $ 7 billion Source: Author's estimates based on pro forma numbers. Looking Forward Aurora expects to deliver positive adjusted EBITDA in the June quarter. Aurora first announced this goal in February 2019 and has confirmed this goal in its 14-year redemption. This will be the company's first positive adjusted EBITDA quarter for at least two years – longer than the company has used metric. Aurora has also suggested that it will produce at least 25,000 kilos of cannabis in the June quarter, compared to 15,590 kilos in the quarter and 1,206 kilos a year ago. Prior to these revenues, analysts expected Aurora to generate $ 282 million in revenue in Fiscal 2019 (end of June 2019), implying expectations of about $ 130 million in revenue in the next quarter – an almost 100% increase over that quarter. current quarter. Analysts also expect Aurora to generate nearly $ 800 million in revenue next year, resulting in sequential growth rates in the high teens over next year. The biggest driver of Aurora's growth over the next year is probably the Canadian cannabis recreational market. According to my research, the sale of cannabis has been roughly flat throughout February 2019. However, they are likely to increase meaningfully the beginning of April 2019, when Canada's largest province has opened its first batch of stores. Even adding 25 stores in Ontario can increase sales by up to 60%, according to some estimates. Aurora's Canadian cannabis sales in Canada will also increase as the company adds more cultivation capacity and as new cannabis products – such as edbles and vape pens – are legalized this fall. These products can lure new users into cannabis stores, but even more, they will add more existing cannabis users to the Canadian legal market from the slow-paced, black market. It is likely that it will take several years for the legal Canadian recreational market to achieve maturity, based on my previous research in Colorado and Washington. Thoughts The Value of Investors Will Not Be Impressed : With a business value of $ 13 billion and expected sales of about $ 800 million by 2020, Aurora is trading about 17×2020 sales. It is very speculative to extrapolate EBITDA margins (and Aurora cannot be profitable in FY2020, starting at just a quarter), but at a long-term steady state 30% EBITDA margin, this means that Aurora can trade at 56x 2020 EBITDA.  This price is very unlikely to attract impaired investors. Instead, Aurora investors are interested in the company's long-term growth and considerably more than one year's growth rate is already priced at Aurora's share price. The same can be said for other Canadian cannabis companies in Canada: It will take many years of good performance and the growth of global cannabis markets for these companies to justify their current valuations. Aurora's results in the quarter : Said Aurora did well in the quarter. Aurora's two major emerging markets in the short term (excluding US legal change) are the Canadian cannabis and European cannabis recreational market. Aurora improved its status in both markets during the quarter. This quarter, Aurora's Canadian recreational cannabis revenue grew 37% quarterly over the quarter, and their recreational use of cannabis (by weight) grew by about 42% QoQ. After Organigram's exceptional February quarter, I didn't know if Aurora could hold onto its second position in the Canadian cannabis recreational marketplace. Aurora has, however, surpassed Organigram's sales in February by 16%. Stats Canada has not released sales figures in March 2019, so it's too early to estimate Auror's market share in the Canadian market (since we don't know the size of the market). Having said that, it is likely that Aurora has passed a market share of 20% after having a market share of 14% last year – a significant improvement and a solid justification for market choice to make Aurora the second most valuable cannabis company in the world. world.  Aurora also had a good quarter in the European medical cannabis market. Aurora increased its European cannabis revenue by 40% QoQ, up to $ 4 million in the quarter. More importantly, Aurora secured a big victory in Germany, and got the right to build a cultivation plant in Leuna that will produce a minimum of 4,000 kilos / year. Only two other companies can claim a similar win and larger rival Canopy Growth is not particularly one of those companies. Looking forward Aurora explores strategic partnerships with Nelson Peltz and will uncover its US strategy. This strategy will probably include a CBD program and will also include Australis Capital (OTCQB: AUSAF), a small multilateral cannabis company that Aurora spun out in September to receive its NYSE listing. In the interview above, CEO Michael Singer stated that Aurora will look to add more partnerships than to control the business of an external company, perhaps with reference to Canopy Growth / Constellation Brands (STZ) and Cronos / Altria (MO) agreements. Aurora's approach to the United States looks thoughtful and raises interesting questions about which part of the cannabis value chain will be more profitable in the future. In the long run, it is likely that the highest margin segments in cannabis are likely to be similar in branded consumer packaged goods, just as owning the Budweiser brand is more valuable than having a chain of liquor stores. Overall, this was a very solid quarter and Aurora has been good in both the Canadian recreational and the international medical market. That said, major losses and negative cash flow will continue to provide ammunition to Aurora's critics. As with almost all Canadian cannabis containers, Aurora looks highly optimistic about perhaps the 17x 2020 sales, which means that Aurora must continue to perform extremely well to provide meaningful long-term returns to its shareholders. The optimistic valuations mean that investors will be exposed to significant risks if the market loses confidence in Aurora, for example, if we fall into a bear market or if the cannabis sector falls out of favor. For my part, I see Aurora as a reasonable investment in the Canadian Canadian sector, but not one of my favorite investments. I remain fully invested in the cannabis sector but currently have no position in Aurora. As I said, Aurora said this quarter well, and its results justify its position as the second most valuable cannabis company. Congratulations on your investment! Growth Drift: Helping Investors Make Smart Investments in the Booming Cannabis Sector We are the largest community of cannabis investors on Seeking Alpha. We recently launched in-depth comparisons by both Canadian LPs and US multistatics investors for investors interested in this fast-growing sector. 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