Shares of Aurora Cannabis (ACB.TO)(ACB) hit a new 52-week low on Monday as the company grapples with a litany of challenges and downgrades. But one analyst sees “an attractive investment opportunity” in the battered Edmonton-based pot producer.
New York-listed Aurora shares fell to $1.51 at the start of Monday’s trading session. The stock has declined more than 80 per cent from its post-recreational legalization high in late March.
Concerns about debt obligations, the abrupt departure of a high-profile executive, weak European sales, and multiple analyst downgrades have weighed on the former high-flying pot stock.
Following talks with management, Cantor Fitzgerald analyst Pablo Zuanic is increasingly optimistic about Aurora’s future.
“This note should not be interpreted as an analyst defending a stock, but highlighting an attractive investment opportunity,” he wrote in a research note on Monday. “We would make use of the recent pullback.”
He sees Aurora as highly sensitive to downgrades and “misplaced market chatter,” due in large part to retail investor ownership. He refutes several arguments that have caused the stock to underperform cannabis peers amid broader weakness in the sector.
Last week, Aurora shares were downgraded by Bank of America analyst Christopher Carey and Piper Sandler analyst Michael Lavery. Both cited risks related to the company’s balance sheet. Scott Willis at Toronto-based research firm Grizzle said Aurora could be headed for “technical default” if it fails to meet its covenants.
Aurora has a $360 million loan due in August 2021. Several analysts have questioned the company’s ability to avoid breaching terms tied to financial performance.
“One of the covenants on Aurora's $360M credit facility is to keep debt/EBITDA below four times after the first quarter of fiscal 2021, which we do not currently project to occur until after the fourth quarter of fiscal 2022,” Lavery wrote in a note to clients last Thursday.
Zuanic expects the company will meet its lender’s requirements, turning a profit by June and reporting adjusted EBITDA of $21 million per quarter by September.
Earlier this month, Aurora’s stock suffered after the company listed a 22-acre greenhouse for sale. MKM Partners analyst Bill Kirk wrote in a research note that the move “implies massive writedowns” are coming. The decision to list the greenhouse for $17 million follows the halting of construction at the Aurora Sun facility in Medicine Hat, Alta., and Aurora Nordic 2 in Denmark, in a bid to conserve cash.
“The facility was never developed and will not be necessary as the company scales back capex plans,” Zuanic wrote of the greenhouse property in Exeter, Ont. “We see this as good and not bad news.”
Aurora got the facility through its $3.2 billion acquisition of MedReleaf in 2018. Zuanic said management told him it was booked at a value of $19 million, but the company is keeping an adjacent property included in that valuation.
Another development at Aurora that Zuanic believes to have been misinterpreted by the market is the abrupt exodus of Cam Battley, the company’s chief corporate officer and most public executive personality. In a press release, the Aurora said Battley “stepped down” effective Dec. 20. Zuanic said he was forced out in a move that should have led Aurora shares higher, rather than the decline seen after the announcement.
“We think ACB would benefit from some pruning and from bringing in an outside CEO renowned in the investment community for both sound growth strategy and financial discipline,” he wrote.
Zuanic said new “high-profile” leadership could push shares to $8.50. He has an “overweight” rating on the stock and a $5 price target.
New York-listed shares climbed 0.61 per cent to $1.66 at 1:19 p.m. on Monday. Toronto-listed shares increased 0.93 per cent to $2.17.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.