Aurora Cannabis (ACB.TO)(ACB) could be three years away from sustainable profit, according to BMO Capital Markets. Analysts see the company drifting past the latest timeline given to investors unless they see more meaningful cost cuts.
Edmonton-based Aurora’s latest bid to improve its financial performance centres on selling more higher-priced cannabis products with wider margins. The premium push bucks an industry trend of offering value-priced pot to compete against the still sizeable illicit market.
Aurora, now under the leadership of new CEO Miguel Martin, is targeting the second quarter of fiscal 2021 to achieve positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). The company has missed two previous profitability targets.
“If Aurora does not endeavour further meaningful [selling, general and administrative expense] cuts, we believe the timeline to achieve the sales volumes that would break even at EBITDA is three years away,” BMO analysts Tamy Chen and Peter Sklar wrote in a note to clients late Monday. “This assumes Aurora can achieve the premium mix in our analysis, which requires a substantial increase from today.”
Their analysis is based in part on ball-park average selling prices, data from the Ontario Cannabis Store, and Aurora’s own gross margin profile before and after the company rolled out its popular Daily Special value brand of pot.
Last month, Aurora said Daily Special accounted for 62 per cent of consumer dried flower sales in its latest quarter, significantly lowering the average selling price per gram. The company also issued guidance predicting net cannabis revenue will be between $60 million and $64 million, a decline from $67.5 million in the three months ended June 30. However, kilograms sold increased 32 per cent on a quarterly basis.
“Aurora needs a substantial increase in current volumes (+25 per cent in flower with a big jump needed into premium, six-fold increase in vapes, three-fold increase in edibles),” Chen and Sklar wrote.
“Because new management is trying to shift from value to more premium, we do not expect growth on a volume basis over the next three years until the company settles into a steady state market share, which we define as low-to-mid-teens percentage. If Aurora is successful in this shift, there should be revenue-dollar growth.”
Can Aurora Cannabis hit its profit goal in 2021?
To Aurora’s credit, the company reduced its selling, general and administrative costs in its latest quarter by $11.2 million versus the prior period. Chen and Sklar expect management to continue efforts to shrink costs.
On the other hand, the company has a reputation for missing profitability targets, having previously projected positive adjusted EBITDA for the quarter ended June 30 2019, and the quarter ended Sept. 30.
“I can certainly appreciate that key stakeholders are skeptical of forward-looking statements from Aurora,” Martin told analysts on the company’s most recent earnings call.
“Look to the data in the coming months to see the trajectory of our success in the Canadian consumer market. If you see progress in our premium brands and adjacent key categories like vapes and pre-rolls, you’ll know the plan is on the right track.”
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.