Founded in 2006 with circa $5 million in capital, Aurora Cannabis (ACB) expanded rapidly via acquisitions including Padanios, CanvasRx, and BC Northern Lights developing a substantial portfolio of cannabis companies under the Aurora umbrella.

Today Aurora trades with a market cap of nearly $9 billion and is positioned as the second largest cannabis company globally behind frontrunner Canopy Growth, having recently overtaken Tilray in terms of this metric. The company is up about 80% YTD broadly in line with sector wide appreciation in recent months.

Achieving economies of scale remains a key goal for the majority of large cannabis companies, and Aurora is not an exception. As the chart below indicates, Aurora believes efficiencies at scale will allow the company to operate profitably in the long term as the race to lowest cost producer becomes of increasing importance to margins. As such, it continues to project rapid expansion targets.

(Source: Aurora Investor Presentation, 2019)

Additionally, the groups subsidiaries have a competitive foundation for expansion via medical products across Europe. The acquisition of Padanios provides the distribution pipeline for cannabis to pharmacies across the continent.

As the legal framework for medical cannabis is introduced to a greater number of countries and jurisdictions while the scope of use is widened, the European market will become of increasing importance to established Canadian cannabis firms. It is perhaps worth noting the trend is strongly supportive of this with the UK recently allowing medical cannabis to be imported for the first time. The case for medical benefits from cannabis appears to have taken great strides in Europe in recent years. Padanios is therefore the preemptive acquisition of an asset base that is likely to witness highly favorable conditions for growth over mid-term horizons. In my opinion, this acquisition is likely to become a catalyst for pan-European growth, and that could lead to a profitable future in the somewhat higher margin medical niche.

Financial Position

Retaining an asset base of $4.875 billion with liabilities of $575 million as of December 2018, Aurora maintains a position of financial strength as it continues transitioning through this high growth outlook for short to mid-term time horizons. The balance sheet at present represents a net book value of circa $4.3b or a multiple of 2.79x on market prices. This is not an unduly high price should management execute a path to profitability within the next 2-3 years.

Revenues remain strong with YoY growth between 2017 and 2018 for Q4 at $10.8m and $59.4m respectively. This is considered typical growth in the sector, and is expected to be maintained through 2019 for Aurora.

However, during Q4 Aurora reported multiple material adverse financial headwinds including a $69.9m write down due to the impairment of investments in associates and a further $119.8m unrealized loss on derivatives. A write down (consisting in this case of two of ten non-core income entries) of $189.7m on a company with a turnover of $59m for the full quarter is indicative of poor performance by management to control costs and risks despite the challenging environment the cannabis maker operates in.

Bottom Line

Aurora trades at a fair multiple to book value should the company execute its short to mid term plans effectively with profitability being the key metric to measure its mid-term success. The balance sheet remains strong and growing broadly in-line with other industry participants.

Progress in exploiting the fully owned medical cannabis distribution pipeline across Europe via Padanios provides a largely untapped (but not unwatched) opportunity that Aurora is well positioned to capitalize upon.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

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