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Report on Business Cannabis Professional Aurora revises down Q4 2019 expectations, analysts maintain positive outlooks

HIGHLIGHTS
  1. Aurora revises up cannabis production guidance in its Q4 2019
  2. Aurora’s latest revenue guidance is below most estimates
  3. Analysts maintain positive outlook for Aurora in 2020

Aurora Cannabis Inc. lowered revenue guidance on Tuesday for its fourth quarter’s performance, “as the industry navigates through periods of volatility,” but expectations for higher cultivation and lower per-gram growing costs caused several analysts to maintain positive outlooks on the licensed producer (LP).

The guidance came after Edmonton-based Aurora said it was targeting positive financial earnings in its fourth quarter 2019, which ended June 30.

On Tuesday, Aurora said net revenue in its fourth quarter was anticipated between $100-million to $107-million. All key business segments – Canadian and international medical sales, and consumer markets – were expected to keep growing, along with improvements in its gross margins.

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The amount of cannabis that was available for sale during the fourth quarter is expected to be reported at the upper end of the 25,000 kilograms to 30,000 kg range, versus previous guidance of 25,000 kg, Aurora said.

“We note that the revenue guide comes in below both our and Street estimates, although we do not consider this a significant surprise given the level of reported monthly retail sales coming from Statistics Canada,” said Cowen Equity Research in a note.

“Given [Aurora’s] strong production output, we would look for this to translate to strong revenue growth in [full-year 2020], particularly as new product form factors come online in late-2Q [December] as well as continued bricks and mortar rollout.”

Previously, Aurora had estimated it would report net earnings in its fourth quarter 2019, but now forecasts this will take place in future quarters. Cowen now forecasts profitability will be “close to break even” with adjusted EBITDA estimated at a loss of approximately $400,000, with Aurora having “a clear pathway for profitability,” particularly versus other Canadian LPs the firm covers.

Aurora’s preliminary report came weeks after CannTrust Holdings Inc., a major LP with a large medical patient base, halted all sales following revelations the company was growing some of its cannabis in rooms without a licence. The Ontario Securities Commission has since opened an investigation into the company.

Cowen lowered Aurora’s fourth-quarter revenue estimate at $104-million but held full-year 2020 unchanged at $711-million, and maintained “outperform” guidance.

BMO Capital Markets said in a report it revised its forecast for Aurora’s fourth quarter 2019 at a loss of $8-million versus $10-million previously, with its EBITDA not expected to turn positive until the third quarter of 2020.

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The bank also revised down its forecast of Aurora’s share of recreational volume to a market share of 24.4 per cent, versus its prior forecast that implied a 33-per-cent share. The bank also upwardly revised its recreational average selling price, modestly raised expectations for international sales, and lowered its target price to $11 from $12.

RBC Capital Markets said in a note it views Aurora’s guidance as “neutral to slight positive”

“Based on this commentary, we believe the company may have positive EBITDA for cannabis operations in the fourth quarter, with the metric on an aggregate basis still in the red,” RBC said.

“We believe that some investors may view the commentary as a relief, given the lack of profitability exhibited by other Tier 1 producers and the risk of the company hitting its internally set target given challenging market dynamics in Canada.”

The production estimate provided by Aurora on Tuesday suggests the LP became the largest supplier of recreational cannabis in the quarter at a time that other growers saw more modest growth, RBC said.

“For fiscal Q4 2019, the Company is targeting to achieve positive adjusted EBITDA,” Aurora stated in its third-quarter Management Discussion and Analysis.

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Aurora’s fourth-quarter and full-year 2019 results are scheduled for release on Sept. 15.

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