Aurora Cannabis (ACB) is well-positioned for the inevitable rebound in the cannabis sector, as it ramps up production capacity, boosts its GMP-compliant output, and develops a variety of derivative products to serve the Canadian and international markets.
By the end of June 2020, the company expects to have well over 625,000 kilograms in annual production capacity, and is now ready to increase the amount of GMP-compliant cannabis to send to the European market.
In this article we’re going to focus on the derivatives market in Canada, which while being approved of on October 17, 2019, won’t be available for sale until December 17, 2019 because of the required 60-day review period required by Canadian law.
With that in mind, the earliest glimpse investors will have concerning the potential impact on the performance of Aurora Cannabis and other marijuana companies based in Canada won’t be until after the first calendar quarter of 2020; that’s because it’ll be the first full quarter derivatives will be sold in.
The three derivative categories Aurora is developing products for are vapes, concentrates, and edibles.
In a press release the company said it “has prioritized its resources to prepare for a successful initial launch that will support an ongoing replenishment strategy to help ensure consumers across Canada will have access to a diverse portfolio of high-quality derivative products they want to buy.”
While I mentioned the first quarter will represent the first look at the potential for derivative sales, it needs to be understood that it won’t reflect the full potential because the company is still developing products it’ll introduce into the market after the initial launch. There will also be ongoing trial and error attempts to gain the most profitable product mix over time.
Vapes are probably the most important category of the next stage of cannabis products because they’re most in demand and command a price premium, although Aurora management did say it’s going to offer a variety of vape products at different price points, targeting all the “major consumer markets.”
The major concern here is how much impact the vaping crisis will have on sales. While the vast majority of health issues and deaths have come from vape sales in the black market, it has cast a shadow on vaping in general.
It’s probable that this will be more visible and less of a concern by the time sales are launched in the latter half of December 2019.
The initial offering in the edibles category will include baked goods, chocolates, gummies, and mints. How it works is “cannabis extract is infused throughout the product to provide consistency, texture and a great flavor.”
Concerning gummies and candies, the company said it has entered into two key partnerships with leading companies to devloped infused candies containing THC and CBD. Management claims it has positioned the company to be the market leader in Canada for edibles.
It has also entered into a two-year global agreement to license JACEK Chocolate Couture’s IP. JACEK is a luxury chocolate brand that Aurora will work with to develop cannabis-infused caramel filled chocolates and chocolate squares.
On the baked goods side of the business, it has entered into a exclusive partnership with WG Pro-Manufacturing & Touché Bakery. Its Aurora River team will work with the two companies to develop this part of the derivatives market.
At launch, one of the early products will be a vegan brownie cookie, followed rapidly by other unnamed products, according to Aurora.
All the products in the concentrates segment will be developed in-house. Among the product forms offered will be those including live rosin, shatter, and sugar wax.
On the production side of the business, Aurora has build production facilities in key areas in various part of Canada, including Aurora River (Bradford, Ontario), Aurora Vie (Pointe Claire, Quebec) and at Aurora Sky (Leduc, Alberta).
This will allow the company to not only distribute products in the Canadian market, but also in various international markets as well.
$5.30 price target
In a very upbeat report, Jefferies analyst Owen Bennett explained last week why he is reiterating a Buy rating on ACB stock. The analyst noted, “We don’t think anyone can argue execution is impressive and on financials, although Aurora missed their target of being EBITDA positive in 4Q19, we do think they will move very close in next quarter, and will be positive into the 2nd half, supported by very impressive sales momentum (consumer feedback on brands is excellent). Another reason is likely near term positive newsflow catalysts, either/or both, an announcement around the US (they have committed to this over the coming quarters) and some kind of partnership with FMCG (remember they brought in Nelson Peltz as an advisor for this purpose).”
Bennett has also suggested that if everything goes as planned, ACB will be a $5.30 stock in the next 12 months, implying well over 40% return. (To watch Bennett’s track record, click here)
When analyzing Aurora Cannabis, there are three major things to consider: production capacity, GMP-compliance (for the EU market), and derivatives. All three of these are coming to fruition near the same period of time.
The company will have more than enough supply to serve all the available markets that are rapidly emerging, as it develops a wide range of products in a variety of forms.
Barring any unforeseen positive catalyst, Aurora will probably have its share price remain subdued through the end of 2019. But as the market takes into account the increase in revenue and widening margins associated with derivatives and its growing sales in Europe, it’ll start rewarding the company once again as its production capacity climbs to over 625,000 kilograms per year by the end of June 2020, and probably closer to 700,000 kilograms per year.
All this will be happening as Canada finally starts to roll out a lot more retail outlets for consumers to buy from. This will not only boost sales in general, but win more share from the black market.
For these reasons I remain bullish on Aurora Cannabis, and consider it undervalued at this time.
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Disclosure: No position