Aurora Cannabis Inc (ACB)

[jessejames001]

This has been known for a while...............

Aurora Cannabis Inc.
Canadian Cannabis | Company Update
Lock up expiry creates a buying opportunity



ACB-TSXV | Price C$2.16 | Market Cap C$728M
SPECULATIVE BUY Unchanged
PRICE TARGET C$2.75 Unchanged




As expected, shares of Aurora have been trading lower recently, down 25% in the last two weeks leading into the December 10 expiry of the lock-up of 57.5 million shares and 28.8 million share purchase warrants. We estimate that the soon-to-be freely-tradeable common shares represent ~27% of Aurora’s float, and is likely to create additional pressure on the stock in the near term. Nonetheless, we continue to view the current weakness as a buying opportunity, particularly in light of upcoming near-term catalysts; these include the expected granting of a sales license for oils, the release of the Task Force report potentially before the end of the year, and the expected tabling of legislation to legalize the use of marijuana in the spring of 2017. While the medical market continues to steadily track higher (and underpins our valuation), we believe that the real torque for investors will come from catalysts driving the recreational opportunity.

Our un-risked analysis for Aurora suggests a valuation in excess of $5.00 per share if marijuana is legalized in Canada, supporting our SPECULATIVE BUY rating as the pathway to the rec market further unfolds over coming months. As such, we continue to recommend that investors accumulate on dips leading into and following the December 10 lock-up expiry for shares of Aurora.

Investment highlights
• Aurora Sky provides an advantage in race to expand capacity. Aurora has recently announced that it has broken ground on its upsized new facility for the production of cannabis. Originally planned as a 650,000 square foot hybrid greenhouse, Aurora Sky will now be 150,000 square feet larger and is expected to have total annual capacity of more than 100,000 kg. We believe this facility should produce sufficient cannabis to meet Aurora’s foreseeable medical and recreational needs.
• New facility should drive production costs substantially lower. Based on current disclosure, actual production costs per gram are difficult to determine. Nonetheless, we believe that the completion of the first phase of its state-of-the-art greenhouse expansion should position Aurora as one of the lowest-cost producers in the space.
• Balance sheet should fund Aurora’s aggressive growth plans. Aurora ended Q1 with cash and equivalents of $50.0 million and an additional ~$30 million to come from in-the-money warrants and options. We believe this should be more than sufficient to fund the first phase of construction of its new cannabis greenhouse facility, and likely the majority of phase two completion.

Valuation

We value Aurora using a sum-of-the-parts analysis; the medical cannabis market based on a DCF model, using a 13.0% WACC and 2.0% terminal growth; and the higher-risk rec opportunity is valued using a probability-weighted NPV. Together, these two analyses yield a target price of $2.75. We note that the entire medical opportunity represents ~$1.75 per share (providing a stable underpinning to our valuation), while our risked valuation of the rec market reflects the remaining $1.00 per share in our target price.




Neil Maruoka, MSc, MBA | Analyst | Canaccord Genuity Corp. (Canada) | [e-mail] | 1.416.869.3073
Matt Bottomley, CPA, CA, CBV | Associate | Canaccord Genuity Corp. (Canada) | [e-mail] | 1.416.867.2394


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