What’s Ahead For Aurora Cannabis After An Impressive FY 2018

Aurora Cannabis (TSE: ACB) reported a stellar fourth quarter (ended June 2018), with revenues increasing 19% over Q3 and a whopping 223% over the corresponding quarter of last year. What makes it even more impressive is that the quarter did not include the full results of its CanniMed acquisition (completed in May), and none of its MedReleaf transaction (completed in July). FY 2018 was a pivotal year for Aurora, as it transformed itself into a fully vertically and horizontally integrated company, helping them to control the entire production and trade process – from growing to selling, as well as diversifying their operations. The company has also placed itself in a great position to take advantage of the legalization of recreational marijuana in October by improving its inventory levels significantly. Moreover, rumors are also rife regarding a possible tie-up with The Coca-Cola Company (NYSE:KO) to develop cannabis-infused beverages. All in all, the future seems to be bright for the company.

We have arrived at a CAD 13.12 price estimate for Aurora Cannabis based on revenue projections of CAD 459 million for FY 2019, a P/S multiple of 20, and a share count of 700 million. The market price stood at CAD 12.77 as of September 25, 2018, implying our price estimate is slightly higher. We have created an interactive dashboard analysis on Our Outlook For Aurora Cannabis In FY 2019 (year ended June 30, 2019). If you disagree with our forecast, you can make changes to these variables to arrive at your own price estimate for the stock.

Highlights From The Quarter

1. Improving Gross Margins: A shift towards higher-margin products, such as pre-rolls, oil, and capsules, has been gaining speed, which has helped the company post better gross margins (reaching 74% in the quarter). The management stated that the company has been able to increase the revenue share of these high-margin products, mainly oil, from roughly 20% in Q3 to almost one-third. These trends are expected to continue in the future as well, with the company launching new and innovative products such as Aurora Frost, hard and soft shell capsules, and new oil types.

2. Capacity Expansion: Just a year back, ACB had one fully licensed facility, two that were under construction, a funded capacity of 180,000 kilograms of cannabis per year, and a presence in just three countries. As of today, the company has eight facilities licensed for production, five sales licenses, and operations in 18 countries. Looking ahead, ACB expects to have 11 facilities and a funded capacity of over 500,000 kilograms per year.

3. Key Acquisitions:

• In September 2017, the company completed the acquisitions of BCNL and UCI, both of which are involved in the production and sale of systems for indoor cultivation of cannabis. This will help ACB cater to the home gardening market in Canada, where roughly 11,000 people are registered to grow either their own cannabis or as designated growers for others.
• In May 2018, ACB completed the acquisition of CanniMed, creating a combined entity with more than 45,000 active registered patients, 7 EU GMP certifiable facilities, and a funded capacity of approximately 430,000 kilograms of cannabis per year. Consequently, this quarter, two-thirds of the company’s results were included.
• ACB also completed the purchase of MedReleaf (TSE: LEAF) for roughly CAD 3.2 billion ($2.5 billion) in July. The primary reason cited for the deal was to strengthen the company’s production capacity, as the merged company would have a combined current capacity of 32,300 kgs, with the possibility of reaching over 570,000 kgs a year. The results of this acquisition will be reflected FY 2019 onward.
• Earlier this month, ACB also announced its intention to acquire ICC Labs Inc. (TSX-V: ICC). ICC is a leader in the South American cannabis market, and has over 70% market share in Uruguay, the first country in the world to legalize cannabis for adult consumer use. Besides this, the company also holds licenses in Colombia for the production of medical cannabis, and has an agreement to export cannabidiol products to Mexico and Brazil. Through this acquisition, Aurora will be able to leverage ICC’s market-leading position in South America, and aid the latter in its expansion plans. This acquisition will also be reflected FY 2019 onward.

4. Improving Metrics: The average net selling prices for dried cannabis and cannabis oils improved over the prior quarter primarily due to higher prices charged on bulk orders, as well as lower promotional discounts offered to new patients. The company was also able to increase its volumes sold, and also built up a healthy level of inventory, keeping the legalization of recreational marijuana usage in October in mind. However, one sore point was the decline in the patient count, which fell 5% over the previous quarter.

5. Impressive Investment Portfolio:

• In May 2018, ACB increased its ownership interest in Hempco to 52.3%, which secures its access to low-cost raw material for the potential production of CBD extracts.
• The company also entered into a strategic investment in The Green Organic Dutchman Holdings Ltd (TGOD), which gives ACB the right to purchase 23,000 kilograms per annum of TGOD’s annual production of organic cannabis.
• Aurora has invested in Alcanna, Canada’s largest alcohol retailer. Alcanna is expected to open the maximum allowed number of 37 stores in Alberta in year one of adult consumer use, and is planning to open additional stores throughout the country in provinces where private retail will be permitted.

6. International Expansion: The global medical cannabis market is projected to grow to roughly 10 million kilograms per year, far more than the current funded capacity of the entire cannabis industry. As mentioned earlier, Aurora now has operations in 18 countries, with a solid footprint in Europe through its acquisition of Pedanios. The company has now started exporting cannabis to Italy and Malta. Through its purchase of ICC Labs, ACB will expand to the South American continent.

7. U.S. Listing: Aurora plans to list its stock on a U.S. stock exchange, a strategy that has been highly beneficial for other cannabis companies such as Canopy Growth, Tilray, and Cronos Group, given the access to a greater level of investment.

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