Aurora focuses on developing low cost production in Canada

On Sept. 11, 2019, Aurora Cannabis (ACB) reported results for fiscal 2019, highlighted by strong sales growth but continued profit losses. However, we’d expect such results from a young company in the budding cannabis industry.

Aurora’s focus on production showed, as 2019 kilograms produced and sold increased 920% and 629% year over year to 57,442 kg and 36,628 kg, respectively, from fiscal 2018. The company's focus on optimization resulted in gross margins of 58% in the fourth quarter, notably higher than other cannabis companies under our coverage. The improvement in gross profit margin was driven by its 20% decrease in production cost to US$1.14 per gram during the quarter, down from US$1.42 in the third quarter.

As a result of its focus on profitability, adjusted EBITDA losses narrowed to US$12 million in the quarter, down from US$37 million in the third quarter. Nonetheless, full-year adjusted EBITDA losses widened by US$100 million versus 2018 to US$156 million for the full year, reflecting higher overhead expenses to support growth.

We’ve updated our model but maintain our fair value estimate of $13 per share for no-moat Aurora. As has been the case for nearly every cannabis company under our coverage this quarter, investors appear frustrated by the pace of growth and lack of profitability, with the stock down 10% as we write.

However, we view such concerns as misguided at this point in the industry’s stage of growth. First, the slow rollout of dispensaries in Canada has restricted what otherwise would be more rapid growth. However, more retail sites are still opening. Second, “cannabis 2.0” should begin in December 2019, as Canadian laws will begin allowing new recreational products such as edibles. Second, with some of the highest gross margins in the industry, Aurora has the seeds to be profitable in the future. Overhead expenses will decline as a percent of sales as the industry matures, turning growing sales into growing profits.