VIDEO: PI Financial Equity Analyst Reiterates Aurora Cannabis Inc (TSE:ACB) Buy Rating of $13
PI Financial Special Situations Equity Analyst Jason Zandberg reiterates an Aurora Cannabis Inc (TSE:ACB) (OTCMKTS:ACBFF) (FRA:21P) buy rating of $13 per share. Aurora’s numerous acquisitions, most notably MedReleaf Corp (TSE:LEAF), their critical mass of production, and sales growth are all catalysts for their future valuation. The CFA believes “its a great time to be buying Aurora in this dip” as the company is nearing a mass inflection point of support in their share price.
James West: Hey welcome back to Midas Letter Live. My guest in this segment is Jason Zandburg. He is the special Situations Analyst at PI Financial Corp covering small cap growth companies. Jason welcome to the show.
Jason Zandberg, CFA: Thanks for having me.
James West: Jason you recently initiated, or not initiated, but rather reiterated a buy rating for Aurora Cannabis Corp for $13 a share. Recently, it’s touched a low of $5.60 and I’m curious to hear if you still stand by that sort of vision for the future price and what are the factors that contribute to your support of it?
Jason Zandberg, CFA: Yeah, no, absolutely. We initiated coverage on Aurora just over a year ago, a lot has happened since then. They’ve made a number of large acquisitions. MedReleaf being the most recent. We love what their critical mass of production is now and they’ve been very aggressive and growing their sales. Some of the recent weakness, I believe, is due to the Medreleaf shares that we’re not locked up and you have insiders in MedReleaf that had been looking to monetize their position, so we did expect some weakness, and I think it’s a great time to be buying Aurora in this dip.
James West: Sure, kind of makes it a buying opportunity.
Do you think that there’s a sort of perception on the part of the retail side of the market that they don’t really understand the full scope of all that Aurora has become, because even I, who looks at the company on a daily basis, looked at the press release that they put out yesterday, that gave us sort of a summary of the global state of the union and I was taken aback by how I hadn’t really considered it in the context of a very, very international footprint. And I get the sense that retail shareholders missed the totality of it as well.
Jason Zandberg, CFA: Yeah, there’s definitely a lot of misconceptions about Aurora. I don’t know where it stems from, but there tends to be a lot of rumours, just in terms of their Aurora Sky facility. And I do find that the market doesn’t understand the company, but yes, they have a great international footprint, they’ve been one of the more aggressive companies that have established production in Denmark, have focused on Australia for a long time now, and are really looking to be, not only a big player in the Canadian recreational market, but also abroad in Europe and globally.
James West: Now they also have made a move towards the US, though not in the form of Aurora, but in the form of Australis, who is at this point is an investee company. And Australis is apparently going to be focused on the United States. What do you know about Australis, and that relationship?
Jason Zandberg, CFA: Yeah, I don’t know a lot about Australis. I know that they’ve spun this out. I know that Aurora has spent a lot of time in the US just understanding those mature markets, so they do have a good knowledge base there and I would expect that Australis will capitalize off of that good experience.
James West: Sure, access to capital is what it’s all about, eh?
Jason Zandberg, CFA: Absolutely.
James West: And no doubt Aurora has lots of that. You have also started coverage of other companies operating in the US and you become somewhat bullish on the US, I guess as a result of a great deal of research?
Jason Zandberg, CFA: Yeah, no, absolutely. We had purposely stayed away from the US market for some time. This is our initiation in the US market, we released coverage, or initiated coverage, on CannaRoyalty and iAnthus just yesterday, and also put out a full report in terms of what we see in the US market. What I like about the US market is it’s a very developed and mature market even though it’s only state-by-state at this point. But we looked at California, they’ve got great brands are developing a great retail landscape, it’s got a lot more growth to happen. But the great thing from an investing point of view is the multiples are less than half of Canadian peers, and we like their upside better. We think that there’s more growth there. So we actually believe that over time, we will see a premium valuation given to the US cannabis companies, and that means big up-side for investors.
James West: Sure, do you think that, it was quite the news item that Sam Znaimer – an investor on the West Coast had been banned for life after admitting to being an investor in US companies listed on the Canadian exchange. Do you think that is something at this point that Canadians need to be sort of cognizant of and might constitute somewhat of a risk?
Jason Zandberg, CFA: Yeah, no, absolutely. I’m not entirely sure why this policy has been sort of ratcheted up a bit, on the border. But yeah, it’s definitely a risk, and it’s something that, especially after we have recreational sales in Canada, Canadians crossing the border, this is going be sort of a new phenomena that Canadians will have to get used to. And I don’t know, I think at some point, the US will change the scheduling of cannabis at the federal level, and this situation will go away. But in the meantime, it’s definitely a concern.
James West: Is there an obligation at this point for the removal of cannabis from the Controlled Substances Act of the United States, based on the fact that the FDA has issued a patent for a drug that is based on cannabis, thereby negating the statement required to be on that list, that there is no medical value? It sort of implies, to me at least, that the federal government is now in a state of conflict that has to be resolved at some point.
Jason Zandberg, CFA: Absolutely, there’s numerous inconsistencies in the Federal stance on cannabis. In our report we looked at polling, we looked at a number of states that have used the legislation process to bring in cannabis because it’s no longer at a political hot potato. I do expect that over time. I’m not sure exactly when. We’re guessing 2020 to be the year when they re-schedule, it’s just a best guess – It’s the next presidential election. But yeah, there’s definitely a lot of inconsistencies. And this will have to be sorted out eventually.
James West: Do you think that is going to take that federal de-prohibition moment to unleash the growth in US companies listed on Canadian exchanges?
Jason Zandberg, CFA: Well, no, I think that the fact that there is this federal scheduling issue in the States is why these US companies are coming in to the CSE and listing. In fact, the de-scheduling will be great for investors, but we’ll start to see US companies listing on US exchanges. But yeah, I do think there will be more capital available to these companies. I do think the valuations will go up, but it definitely will have a different investor landscape from a Canadian standpoint.
James West: Sure, the financing of US cannabis companies has pretty much been the exclusive opportunity of Canadian investors because of the federal prohibition. And do you think itis a great time to get into the US stocks on Canadian exchanges because the valuations are low? and then when prohibition kicks in, call it 2020, it’s going to be US money that takes those valuations higher and delivers a very positive experience for Canadians who stay in it?
Jason Zandberg, CFA: Absolutely, we look at the US market similar to investing in the Canadian Medical marijuana stocks before Trudeau was elected. When Trudeau elected, I looked at the chart for Canopy Growth, and it appreciated 73 percent two weeks after Trudeau was elected. And if you look at the long-term picture, in terms of the Canopy Growth stock chart, it’s a little blip. Meaning that seventy percent, has been multiplied many times over. We see the same thing happening whether it be a new president that is elected in 2020 that’s got a more favorable approach to cannabis, or even if Trump is re-elected but changes the stance on cannabis, we expect that same increase in valuations to it to happen immediately following that.
James West: Do you think that there will be a side effect, whereby Canadian listed companies that are obviously much more highly valued, are going to experience a sort of stampede away from their stocks into these US opportunities?
Jason Zandberg, CFA: Yeah, I do. I mean, I don’t think that there’ll be a complete migration, but even when Medmen went public on the CSE, the CEO was very clear that this was a sort of an interim step before getting an eventual US listing when that time was right, when the federal regulations were changed. So yeah, I would expect to see some migration down south. But the Canadian market has been very good for raising capital for cannabis markets, and it’s become a bit of a niche market in Canada, similar to the mining market, where a lot of international money is raised in Canada. So I do expect that to continue, but it may be less so when the Federal US regulations change.
James West: Sure, you mentioned iAnthus and CannaRoyalty, what is it about those companies that attracts you?
Jason Zandberg, CFA: Well, we love CannaRoyalty, given their focus on the California market. They had been for a number of years investing minority interests in a lot of US cannabis companies. They switched over earlier this year to buy a 100 percent and actually operate companies in California. We love California, it’s the largest cannabis market in the world. State-wide recreational sales began earlier in January this year. We just think that’s a huge market, it’s bigger than Canada in terms of population. So CannaRoyalty presents one of the best plays in California.
iAnthus on the other hand is more East Coast focused. So the one thing about iAnthus is that they’re well-situated in states like New York and Florida. Where it’s still a medical only state but we’ve found that anyone that gets roots when it’s medical, when it converts into a recreational market, that’s a head start for a lot of medical companies that have dispensaries in great locations and so we would expect iAnthus to benefit when we see some more change from the state level of recreational laws in the coming years.
James West: Okay, well that’s great Jason, I really appreciate the input and was great to finally have you on the show. I hope to do it again soon. Thanks for joining me,
Jason Zandberg, CFA: Absolutely, thanks for having me on.
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