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Feb 7, 2020

Aurora sinks on bad news analysts fear won't end

Analysts downgrade Aurora amid corporate reset

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Aurora Cannabis Inc. slumped as much as 19 per cent Friday after the company dumped a kitchen sink worth of bad news on investors.

Founder and Chief Executive Officer Terry Booth is stepping down. It’s cutting 500 employees as part of a major cost-reduction effort. It will record as much as $1 billion in goodwill writedowns and asset impairment charges in its fiscal second quarter. Its credit facility has been cut by more than one-third. And its preliminary second-quarter revenue was well below analyst estimates, with little to no growth expected in the third quarter.

Analysts expressed surprise at the magnitude of the miss and skepticism that it can achieve its cost-cutting goals. They also speculated that further writedowns may be needed, with at least four downgrading the stock Friday.

The news also sent the rest of the sector tumbling, with Canopy Growth Corp. down 6.5 per cent, Aphria Inc. falling 3.8 per cent and Tilray Inc. lower by 4.8 per cent.

Here’s what Wall Street analysts have to say:

Canaccord Genuity, Matt Bottomley

Bottomley downgraded Aurora to hold from speculative buy and reduced his price target to $3 from $6, citing “a number of red flags.”

“Although we don’t view the departure of Mr. Booth in isolation to be a concern, after disappointing FQ1 results, increasing industry headwinds and now surprisingly muted expectations for Aurora’s remaining FY20, we have made substantial downward revisions to our model.”

Believes Aurora’s cash on hand and at-the-market equity program are “sufficient to fund the company’s initiatives over the next 12-18 months under its revised business plan,” but it’ll be “tight.”

Eight Capital, Graeme Kreindler

Kreindler cut Aurora to neutral from buy and slashed his price target to $2 from $6, pointing to its weak preliminary second-quarter results and a $12 million provision for sales returns.

“While we expected sales returns to occur in the quarter, the magnitude was much greater than expected, in addition to lower overall volumes.”

Kreindler said Booth’s departure as CEO “signals the ongoing maturation of ACB and the entire sector from its entrepreneurial roots to an industry that continues to prioritize disciplined cash flow management and returns on capital.” He expects his replacement to “have experience in managing a global business and a track record of allocating capital in strategic initiatives.”

MKM Partners, Bill Kirk

“Aurora management, led by Terry Booth and Cam Battley offered some of the most optimistic and ultimately incorrect predictions. We believe this optimism, particularly around growth and profitability created an organization with a bloated cost structure and a capital structure with burdensome convertibles and a heavily diluted equity base.”

Aurora said the writedowns and impairment charges were primarily connected to international assets. However, Kirk continues “to firmly believe writedowns are deserved in Canada.”

On its CEO search, Kirk believes that “Aurora will have a hard time attracting the talent necessary to instill investor confidence.”

Rates Aurora sell with a $2 price target.

Cowen, Vivien Azer

“Industry-wide management changes are a telling sign that the industry has matured some (though not fast enough), and gotten competitive enough, that founder-led strategies aren’t going to cut it in a capital constrained backdrop.”

Aurora’s goal to reduce its quarterly SG&A by about 50 per cent over the next two quarters may draw skepticism, but “we are somewhat comforted to hear that it does not embed any meaningful revenue progression to generate operating leverage to achieve these goals.”

Management indicated that it’s trying to be extremely conservative with its sales forecast, “which we appreciate, as the revenue outlook will clearly inform the cost and profitability targets that the company laid out.”

Azer rates Aurora outperform with a $6 price target.

BMO, Tamy Chen

“We consider today’s announcements to be a much needed reset.” However, Chen is “cautious on the company’s ability to achieve positive cash flows by the time the entire ATM facility is used” and believes it will still need additional funding by fiscal 2021.

Said Aurora can achieve some of the cost reductions that it’s targeting, but given the ongoing rollout of new products like vapes and edibles, “we are cautious on Aurora’s ability to realize a full $50-55mm reduction in quarterly opex by the end of FQ4/20.”

Chen rates Aurora market perform and reduced her price target to $3 from $4.

Compass Point, Rommel Dionisio

Aurora’s actions and similar moves by its peers “represent a significant shift among major cannabis producers from the growth-at-all-costs, rapid land grab approach to a more prudent strategy focused on achieving near-term operating profitability and positive free cash flow generation.”

However, “given still cloudy visibility in the Canadian market on continued pricing pressure and the slow pace of retail store openings in key regions such as Ontario, combined with management uncertainty at Aurora given the just announced leadership change,” Dionisio, who rates Aurora neutral, cut his price target to US$2 from US$5.

What Bloomberg Intelligence Says

Aurora’s sweeping restructuring announced on Feb. 6, aimed at slashing its expense base and capital spending to better align its organization to the weaker-than-expected Canadian legal cannabis market, is a necessary step to preserving its dwindling financial resources, in our view. --Kenneth Shea

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