Aurora Cannabis Inc (TSE:ACB) Threatens Single Digits Stock Price—What Comes Next

Benjamin A. Smith
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Early this session, Aurora Cannabis Inc (TSE:ACB) (OTCQB:ACBFF) (FRA:21P) entered single-digit territory as prices plunged to $9.95/share at the open. Overall, it’s been a miserable last couple of weeks for the cannabis bellweather, shedding around 16.94% (peak-to-trough) from the March 6 swing high. We examine some base causes for the dysphoric sentiment, and possible catalysts which may allow Aurora to perk back up again.

Broadening out our timescales a little bit, the genesis for Aurora’s descent from $15/share began in late January, as the destruction of short volatility derivative complex lead to generalized “risk-off” sentiment in the market. Not only did risk assets get hammered, this destruction was powerful enough to put the S&P 500 into a short-term technical correction.

Prior to this event, the market hadn’t had even a 5% selloff since England’s ‘Brexit’ vote in June 2016. Although the phenomenon affected American markets mainly, anything cannabis-related entered the wood chipper. Risk-off sentiment affecting U.S. cannabis stocks had seeped northward.

Unlike the rest of the sector, however, Aurora Cannabis also announced a major acquisition at the time. While the deal was generally warmly received by investors, it was undoubtedly dilutive.

The February 5 Improved Offer provides CanniMed Shareholders with the right to elect to receive for each CanniMed Share (i) 3.40 Common Shares; (ii) $0.43 in cash; or (iii) any combination of Common Shares and cash. Assuming that shareholders elect the cash alternative, each CanniMed shareholder would receive $5.70 in cash and 2.9493 Aurora Shares for each CanniMed Share. Regardless of outcome, between 72-84 million new common shares will be issued.

Keep in mind, the longer Aurora Cannabis stock trades below the $12.65 volume-weighted average share price used in the revised offer, the greater the chances CanniMed shareholders will accept the cash portion of the deal. That may save dilution now (towards the 72 million share range), but it raises the chance Aurora will conduct a capital-raise later on. Investors cannot be certain that additional dilution isn’t coming down the pike.

With the double-whammy of dilution and generalized sector selling taking place, there was nowhere to run. Aurora Cannabis dropped over 53% (peak-to-trough), while its only real peer in the space—Canopy Growth Corp (TSE:WEED) (OTCMKTS:TWMJF)—dropped around 45%. Although that difference is relative minor, Aurora’s subsequent price action following its early-February oversold bounce has confirmed the divergence.

More Recent Times

As mentioned, the post-February snap-back rally has really opened up the chasm between Aurora’s performance and that of Canopy Growth. Since February 7, Aurora Cannabis is down close to (18%) while Canopy has risen almost 35%. As of this writing, the former is threatening to close down for seven straight sessions, while the later has busted its 50-day MA to the upside. Both companies even announced similar plans to dual list on foreign exchanges, with completely diametric results. Quite obviously, it’s been a tale of two sentiments.

So what happened? Is additional supply driving the divergence being witnessed between both companies? I believe the answer is both yes and no. Aside from dilution, other factors appear to be at play. The institutional analysts which drive the large institutional money appear to be at different sides of the ledger.

A few days ago, Neil Maruoka of Canaccord Genuity downgraded his rating of Aurora Cannabis from “speculative buy” to “hold”. His implied 12-month price target meant the stock was already trading at full value. While earnings estimates were revised upwards to account for the CanniMed deal, valuation still appears rich.

With Aurora trading at 28.3-times Canaccord’s two-year forward EBITDA forecast (versus an industry around 20-times), the investment bank deems the stock ‘fully valued’. This, despite anticipation that the Aurora-CanniMed merger (along with license deals with Shopper’s Drug Mart), will create a “dominant medical franchise”.

Contrast this opinion with recent Canopy Growth Analysts coverage by Martin Landry of GMP Securities. The analyst continues to feel bullish about the stock after visiting the company’s Aldergrove and Delta facilities. Landry maintained his “Buy” rating and one-year price target of $40.00 on the stock. That’s implies an upside of around 18.8% based on the closing price of $33.68/share at the time of the call.

With Aurora Cannabis recently added to the S&P/TSX Composite Index—and legalization around the corner—we look forward to increased analyst coverage as opposed to sporadic reports we’re currently getting. It’s only a matter of time before the Big Six banking analysts start weighing-in,  providing for better instituional clarity.

In the meantime—based on the evidence hitting my desk—it appears the big money believes Canopy Growth has the biggest intermediate upside potential. For now, anyway.

Aurora Cannabis: In Search of a Catalyst

From my perspective, the biggest near-term catalyst in the imminent listing of The Green Organic Dutchman IPO. Aurora will own 33.33 million shares upon listing, and a strong showing by the organic cannabis grower has the potential to boost Aurora’s overall sentiment. We note however, that Aurora’s investment is a relatively small portion of their asset base. Still, if TGOD (as it’s known) should trade close to $5/share or so, the $45 million boost to Aurora’s balance sheet certainly won’t dampen spirits.

Aside from that, the company has several intermediate term catalysts which are a few quarters out.

For instance, the company’s Aurora Nordic subsidiary is set to commence the cultivation of cannabis in the summer of 2018. Aurora Nordic will focus on the cultivation and sales of cannabis in Denmark, Sweden, Norway, Finland and Iceland through Pedanios. The subsidiary should also break ground on the construction of an ALPS designed 1,000,000 square foot high-technology, fully automated cannabis production facility.

While the aforementioned facility won’t be completed anytime soon, that forward-looking buzz should help provide the company ample visibility. We saw evidence of this phenomenon occur on February 20, when Canopy Growth jumped 11.69% on word it had obtained license for first mega-scale BC facility. Although this isn’t an apples-to-apples comparison by any stretch, the PR associated with facility construction has the potential to brighten investor moods. Aurora Nordic is still among the few companies with a cultivation license in Europe.

Other potential impactful intermediate catalysts—in no particular order— include:

  • A seamless integration with CanniMed Therapeutics
  • A potential third up leg in the cannabis sector, which allows for valuation extension in the sector
  • No further investor dilution in the back half of 2018
  • Cementing of further distribution agreements, similar to February’s Shopper’s Drug Mart alliance

For the first time since the company began trading on the Toronto Venture Exchange (now TSX), the stock has diverged significantly from Canopy Growth. Whether it’s able to right itself and move directionally with WEED will be an interesting subplot of the spring cannabis trade.

Technical Take

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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