On Feb. 6, Aurora (ACB) announced major strategic changes, including cost-cutting initiatives and the retirement of founder and CEO Terry Booth effective immediately. Booth will remain a senior strategic advisor to the board. The board has initiated an executive search and has appointed executive chairman Michael Singer as interim CEO.

Aurora is in a tough spot. Like all Canadian cultivators, its top line growth has suffered from the frustratingly slow rollout of the legal Canadian market. Our view on the country’s massive market potential is unchanged, but the slow growth has weighed heavily on profits as companies spend rapidly to grow bigger. Despite very low production costs, the challenge is exacerbated for Aurora relative to its peers due to the lack of a large strategic investor. Whereas its competitors have deep-pocketed companies that can serve as a capital backstop, Aurora can only rely on the capital markets. Further, financing availability has been tight given investors’ frustrations with Canada’s pace of growth and the resulting plunge in share prices.

We’ve updated our forecast to reflect spending cuts but also slower growth than we previously anticipated. As a result, we’ve reduced our fair value estimates to US $7 per share and CAD $9.50 per share, down from US $8.50 and CAD $11.50 for no-moat Aurora.

We’ve also increased Aurora’s uncertainty rating to extreme. All other cannabis companies are rated very high uncertainty due to the wide range of potential valuation outcomes dependent on the pace of regulatory changes and distribution expansion. But Aurora’s higher dependence on capital markets without a strategic investor adds further uncertainty.

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