Aurora Cannabis Inc (TSE:ACB) WMM Purchase Bodes Positively For Niche Canadian LPs
Aurora Cannabis Inc (TSE:ACB) (NYSE:ACB) (FRA:21P) has made yet another portfolio purchase today. The cannabis LP known for dealing acquired a modest-sized organic certified growth for an eye-popping price tag. The precedent-setting result establishes an amount Tier-1 cannabis is willing to pay for earnings-accretive juniors checking certain boxes along the value curve.
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According to the press release announced this morning, that amount is up to C$175 million. That’s the bounty Whistler Medical Marijuana Corp. (WMM) will receive in ACB stock, in an all-share transaction which includes certain milestone payments. Not too shabby when you consider WMM will only boast approximately 5,000 kg/year of production capacity by summer 2019.
While Whistler Medical Marijuana doesn’t bring scale to the table, it owns ancillary qualities that provide Aurora Cannabis value. WMM has been cash flow positive since 2015, with EBITDA margins in excess of 30%. Selling prices for its products have purportedly sold in excess of 50% greater than average Canadian medical and adult-use markets—an impressive metric which validates both WMM’s organic cannabis premium and branding position.
Belying it’s small stature, WMM has multiple supply agreements with the provinces. According to the presser, that includes British Columbia, Saskatchewan and the Yukon, as well product requests from Alberta, Manitoba, and Ontario. The company’s genetic bank is also quite established, with over 150 strains and 30 commercial flower varieties and strain-specific oil products produced so far.
Perhaps most most importantly, Whistler Medical Marijuana represents the first organic certified cannabis products sold recreationally in Canada. Whistler’s second facility is being constructed in compliance with EU-GMP standards which, upon certification, will enable the Company to supply organic-certified products to Europe. That includes organic oils—which will likely sell huge premiums in the European market—where product supply is currently constrained. As a reminder of the type of premiums WMM could expect, recall competitor Canopy Growth Corp. disclosed that they sold dry flower in Germany for $13.62 per gram during their Q1 2019 earnings call. That’s an approximate premium of ↑58.00% over the average legal retail price in Canada.
Ultimately, Aurora’s deal with WMM shouldn’t be viewed through a production capacity lens investors have been conditioned to overvalue. As Canaccord cannabis analyst Matt Bottomley contends, ACB is paying for one of Canada’s most established brands (albeit modest)—one which is not impacted by stringent marketing restrictions imposed by the Cannabis Act.
Canaccord Analyst, Matt Bottomley, reiterates his BUY Rating on @Aurora_MMJ $ACB on the Whistler acquisition. He highlights the value is "not in the incremental capacity acquired" but brand, differentiated organic certified products, extraction capabilities, and intl export 🌲🌍 pic.twitter.com/8p3Rb4NmXh
— Aaron Salz (@StoicAdvisory) January 14, 2019
I will add that WMM also hits two decisive branding notes here, as it is regarded as high-grade “BC Bud” producer (in itself, a branding genre), and connected with the Whistler lifestyle, a ski-mecca where 2.7 million visitors flock to each year. When consumers think about British Columbia and cannabis concurrently, invariably images of young adults partaking on snow-capped peaks and thawed valleys come to mind. Aurora Cannabis, it would appear, is buying into a branding ideal as much as anything WMM has to offer.
And that’s great news for other Canadian juniors able to separate their wares from the pack. Aurora has conclusively demonstrated that an obscure junior doesn’t have to be the biggest cannabis producer or glitziest dress in the closet. As long as the right boxes are checked—granted, a high bar for many—other niche juniors may well be on the receiving end of such future deal flow.
Update 5:34 pm EST
It didn’t take long for other would-be junior organic players to plead their valuation cases. Not long ago, Rubicon Organics commented on the sale of Whistler Medical Marijuana Corporation to Aurora Cannabis Inc. for $175 million. While Rubicon—along with others like James E. Wagner Cultivation—are comparatively immature in relation to WMM, respective valuations are 2.5-times cheaper with greater production capacity upcoming. Investors must decide whether the significant operational (road map) risk is worth the reward. Neither organic certification and/or EU-GMP compliance is assured.
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