Two analysts have begun warming up to Aurora Cannabis (NASDAQ: ACB) but for two entirely different reasons. Stifel analyst W. Andrew Carter upgraded his rating on Aurora from Sell to Hold and lowered his target price from C$2.50 to C$2.15. Cantor Fitzgerald analyst Pablo Zuanic upgraded his rating from Neutral to Overweight and increased his price target from C$3.90 to C$4.05. The stock is currently trading around C$2.00 ($1.55).
The Stifel report focuses mostly on Aurora’s recent bought deal offering. The original announcement of the offering and attached warrants caused the stock to sell off by 40%. The analyst believes the stock’s valuation properly reflects the 31% dilution caused by the offering that will bring Aurora’s share count to 297 million. However, the plus side to the offering is that it brings in an estimated C$240 million. Carter wrote, “We estimate Aurora will have just over C$500 million of cash at the end of 4Q22 with C$450 million of available cash.” Stifel also pointed out that the company could have as much as C$90 in cost savings as it right sizes its expenses to recognize the limitations of Canada’s adult-use market. Carter’s report says Aurora will generate positive EBITDA in the first half of 2023.
While the Cantor Fitzgerald analyst Pablo Zuanic touched on Aurora’s offering, his analysis zeroed in on the company’s potential in the German market. He wrote, “We expect Europe and more specifically Germany, to be a relevant potential catalyst and sentiment driver for cannabis stocks over the next 12-18 months.” Only Aurora and Tilray have licenses to produce in Germany and it is questionable whether the country will allow imports and may limit country licenses. “We believe that Germany is likely to legalize rec sometime in 2023 and sales could begin in 2024,” wrote Zuanic. Meaning this theme could take some time to play out.
The current medical market in Germany is about 30 tons or 480 million euros. Cantor thinks that the German adult-use market could reach $4 billion in the first year. The report points out that Germany has a population of 83 million versus New York’s population of 20 million, suggesting a bigger market than what is expected to be the largest state market in the U.S. However, the cultural comparison isn’t addressed, i.e. the overall liberal nature of New Yorkers versus the relatively conservative nature of Germans. The analyst acknowledged the uncertainty of the situation but still believes the potential for the German market is not reflected in Aurora’s valuation. Cantor thinks the German market could double Aurora’s sales.
Cantor’s take on the offering was that it was just “poorly timed.” Zuanic thinks the 40% selloff for just 20% dilution signaled a buying opportunity. Plus, even though the company did dilute shares through the offering, it also bought back $20 million of its outstanding convertible debt. The analyst wrote, “We expect the company to continue to buy back debt. Also, as fundamentals improve, we assume the company will be able to refinance part or all of the convertible debt.”
The price target is also worth addressing since it is much more generous than Stifel’s. Cantor wrote, “To set the price target for ACB, we use ‘normalized EBITDA margins’ by division and assign different multiples to the various units using a sum-of-the-parts approach for our FY24 estimates….Our method yields a June 2023 price target of C$4.05 taking those FY24 (June) numbers.”
Cantor doesn’t think cannabis stocks will move very much without some sort of legislative reform in the U.S. Whether it’s banking legislation or something else, they see that as the catalyst to move the group. They don’t think the addition of new market states like New Jersey and New York will actually move the needle for the overall group.