Rating
Perspectec
SELL
Aurora Cannabis
12-Month Price Target
Post Fiscal Q4/18
$5.00 The only LP who refuses to talk to us
October 2, 2018 Price Robin Manson-Hing
Perspectec’s Cannabis Thesis
All figures mentioned are in Canadian dollars unless otherwise indicated.
The Canadian recreational opportunity over the next 4 years available to Canadian companies dwarfs the International medical market.
Following the path of Colorado, early sales are highly dependent on the # of stores. Canada is pacing to a relatively slower start.
Delays w/ Ontario stores and increases in Licensed Producers’ (LPs) production capacities will transform the viability of Canadian LPs in the 1st half of 2019.
The impact from food, drinks and other derivative products will be a 2021 story based on Colorado trends.
M&A premiums are in (LP) stock prices to various extents. However, M&A makes little sense at these valuations.
20x EBITDA on a scaled business is a reasonable valuation. This is in-line with other established ‘getting high’ beverage companies.
Aurora Cannabis Sell Thesis
BAD OPERATORS
HIGH OIL CONVERSION COSTS
VERTICAL INTEGRATION IS DISAPPOINTING
RED FLAG WITH MANAGEMENT
WORSENING PRODUCTION CONDITIONS
EBITDA MARGINS MAY BE ½ OF EXPECTATIONS
MANAGEMENT CAN APPROACH 17% EBITDA MARGINS THROUGH MORE DISTRIBUTION
TARGET PRICE OF $5 WITHIN 12-MONTHS.
SELL RECOMMENDATION: CATALYST WILL BE REPORTING CONSISTENTLY DISAPPOINTING RESULTS.
We estimate 16% of Canadian cannabis demand will come from Alberta, but over 60% of Aurora’s Canadian production is coming from that province.
Quarterly Capacity in KGs
| Quarter | Capacity (KGs) |
|---|---|
| Q1 | TBD |
| Q2 | TBD |
| Q3 | TBD |
| Q4 | TBD |
Questionable Locations: Numerous Facilities & Supply Agreements Make Economies of Scale More Difficult.
Source: Perspectec
Perspectec's Cash Cost of Sales:
Expansions, some economies of scale, increased automation and learning should help lower cash costs. Some facilities may prove uneconomical (i.e. Saskatoon).
The production capacity for Aurora is expected to reach an annualized capacity of 390K KGs by the end of calendar 2019 (excluding the 120K KG/year from the 51% owned NORDIC facility in Denmark).
Cost per Gram Sold
Currently, questions surrounding locations and subsequent shipping costs will continue to impact GM% including shipping.
- Assuming dried flower shipment of 6 grams @ $8 per gram minus e-Commerce commission ($1.45) = $46.55. Real cash costs (LQ) of $1.96/gram = $34.80. Delivery costs from Edmonton to Toronto is $15 = real gross margin after shipping of $19.80. $19.80/ $48 = 41%.
41% Gross Margin on Dried Cannabis Shipments to Toronto.
Assuming oil shipment of 6 gram equivalents @$14= $84. e-Commerce commission ($2.32) = $81.68. Real cash costs (LQ) of $8.80/gram = $28.89. Delivery costs from Edmonton to Toronto is $15 = real gross margin after shipping of $13.89. $13.89 / $84 = 17%.
17% Gross Margin on Cannabis Oil Shipments to Toronto.
Shipping Concerns:
What is the Edmonton Airport (SKY) Facility Good For?
Geographic coverage of under 2 million people with significant transportation for the last mile at a minimum. Retail outlets will be distributed broadly, not just in major centers.
Upcoming facility openings and acquisitions should help Alberta, Ontario and Saskatchewan, but EBITDA margin will be affected by the shipping strategy.
Little Economies of Scale w/ Shipping: Orders are delivered individually.
Questionable Locations
Major Greenhouse Locations of Big 3
- ACB Avg. Edmonton Temp = 2.6°C
- ACB Avg. Medicine Hat Temp = 6.1°C
- ACB Avg. Exeter, Ontario Temp = 7.9°C
- WEED Avg. Niagara-on-the-Lake Temp = 9.2°C
- APH Avg. Leamington Temp = 9.6°C
Worsening Production Conditions
Alberta’s Electricity Rates are Skyrocketing: August’s variable rate was ¢9.837 per kWh and is trending higher, with legislative efforts pushing for the elimination of coal power.
Ontario Electricity Costs: Ontario’s kWh electricity rates held steady after coming down from 2016 peaks.
Over 50% of hours in Ontario are off-peak, achieving a savings rate between ¢8.9 and ¢11 per kWh.
Adjusted Cash Cost Analysis
| Company | Ticker | Estimated Cash Cost of Sales per Gram | Estimated Adjusted Cash Cost of Sales per Gram | % of Oil Equivalent Sales |
|---|---|---|---|---|
| Aphria | APH | $2.18 | $2.18 | 15% |
| Aurora | ACB | $2.59 | $2.59 | 17% |
| CanniMed | ACB | $3.74 | $3.74 | 41% |
| Canopy | WEED | $2.74 | $2.24 | 11% |
| Cronos Group | CRON | $3.91 | $3.41 | 9% |
| MedReleaf | ACB | $2.04 | $2.74 | 18% |
| Tilray | TLRY | $3.37 | $2.21 | 2% |
| Weighted Average | $2.68 | $2.53 |
Source: Perspectec
Market Positioning
Unusually High Oil Conversion Costs: Aurora’s costs are 20x that of Aphria to convert dried flower to oil on a gram equivalent basis.
Concerns Around Recreational Oil Market: Canopy Growth focuses on zero-calorie Marijuana drinks and may do better in the market than Aurora.
Summary Statements
Our ACB Target Price is $5, being reached by September of 2019. We believe investors should sell the shares now.