‘Neither justified, nor sustainable’: Aurora downgraded post-rally

(AP Photo/Richard Drew)
(AP Photo/Richard Drew)

Aurora Cannabis (ACB.TO)(ACB) shares have climbed more than 140 per cent in five trading days, prompting a warning from Jefferies analyst Owen Bennet about persistent challenges facing the pot producer.

Mixed third-quarter results and the all-share acquisition of a U.S. CBD brand with access to thousands of convenience store shelves have lifted the stock, which was recently at risk of being delisted from the New York Stock Exchange prior to a 12:1 share consolidation.

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Bennett downgraded Aurora shares to “underperform” from “hold,” but raised his price target from $12 to $14 for Toronto-listed shares and from $8.40 to $10 for U.S. shares, citing longer-term optimism.

“Despite a relatively positive Q3, we downgrade to underperform, with the re-rating seen post numbers neither justified nor sustainable in our view,” Bennett wrote in a note to clients on Friday. 

“We think near-term sales and gross margin headwinds are not fully appreciated, while celebrating a hiatus on further dilution is short-sighted, it inevitably returns again when the balance sheet is addressed.”

Aurora’s debt-heavy balance sheet and financing challenges have been persistent criticisms among investors, prompting the company to reign in spending and cut costs. Last week, the company said it shrunk its debt to $592.7 million from $644.8 million a year earlier. Aurora has about $230 million in cash on its balance sheet, and lowered its quarterly cash burn to about $143 million, from about $265 million in the prior quarter.

“The balance sheet is still in a delicate position, and it is touch-and-go whether Aurora will meet its renegotiated credit facility covenant in Q1,” Bennett wrote. 

“It would not really appear the right time to be making a key move into the world's biggest market, especially when one considers it will require investment to make it succeed, and the balance sheet does not really grant Aurora that luxury.”

Aurora has yet to announce a permanent leader since the departure of chief corporate officer Cam Battley and Terry Booth’s decision to step down as CEO, prompting Bennett to question the timing of the Reliva U.S. CBD acquisition. 

“A move into the U.S. is arguably the biggest strategic decision for the company right now, and making that decision before anyone is appointed in our view suggests there may not be any hires imminent,” he wrote. “This arguably makes the role less attractive now too. Any new CEO is now somewhat tied to this acquisition and tasked with making it work.”

Aurora’s interim CEO Michael Singer did not offer new details about the company’s hunt for a replacement CEO in an interview with Yahoo Finance on on Friday.

Singer touted Aurora’s “responsible and strategic” foray south of the border as a win for shareholders, given Reliva’s profitable, asset-light business model, and expansive retail reach.

“We have immediate access to the world's largest cannabinoid market, and that's so important,” he said. “Reliva’s business today is profitable. So it’s incremental to that strategy for Aurora.”

The company has promised positive adjusted EBITDA in its first fiscal quarter of 2021. Aurora has missed such targets in the past, having committed to profitability in the fourth quarter of 2019.

While a wide-range of CBD-infused products have gained traction with U.S. consumers, regulatory uncertainty is an ongoing challenge within the increasingly competitive category. The U.S. Food and Drug Administration has yet to rule on how such products should be sold. 

Reliva CEO Miguel Martin told Yahoo Finance that his company’s “compliance-driven” focus will ensure it’s well-positioned to address changing regulations. He added Reliva’s access to thousands of convenience stores will be an asset as well.

“The history with regulated products is they typically end up in regulated stores, whether that be stores that sell tobacco or alcohol, which today [convenience] stores are the preeminent,” he said.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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