Miami-based investment banker Ladenburg Thalmann waded into the marijuana patch Wednesday, initiating coverage of a quartet of cannabis stocks. Unsurprisingly, among these was Aurora Cannabis (ACB), currently the No. 2 Canadian cannabis company by market capitalization and, as analyst Glenn Mattson pointed out, owner of “the top 5 selling [marijuana] brands in British Columbia.”
In a stats-heavy initiation report, Mattson laid out its investment case for Aurora Cannabis. The analyst rates Aurora Cannabis stock a ‘buy’, with a $9 price target, which implies nearly 21% upside from current levels.
On production Rates
At the end of March 2019, Aurora Cannabis boasted an annual production capacity of 65,000 kilograms of cannabis product. By early next year, the company expects to more than double that capacity to 150,000 kg. More incredibly, by the end of next year, the company will quadruple that number — and be growing 625,000 kg per year by the end of calendar year 2020.
Cost of production at some facilities is approaching $1 per gram, an industry low.
“One feature of this company is that they look to bring industrial scale to their growing facilities. The benefit of this approach is that they lower their average cost significantly. In the case of the company’s largest facilities like Aurora Sky and Aurora Sun, the production costs per gram are expected to be under $1 once the space is fully functional,” Mattson noted.
On expansion — at home and abroad
Since 2016, Aurora Cannabis has effected 18 “strategic acquisitions” and made 12 “strategic investments … across the value chain.”
Internationally, the company now operates 15 global production facilities and is “active” on five continents and in 24 countries, including Australia, the Cayman Islands, Denmark, Germany, Italy, Lithuania, Malta, Mexico, Poland, and South Africa (and Canada, of course). Its activities range from cultivation to processing to retail (in order to gain “insight into trends as they evolve in the industry”). While most cultivation and processing is currently conducted in Canada, the company purchased a 51% ownership stake in cannabis cultivator “Gaia Pharm” — now renamed Aurora Portugal — in February 2019.
Mattson points out that “While some firms are being cautious about expansion with the possibility that the Canadian market may see oversupply, Aurora is taking the view that the market for cannabis will be global and it can export to areas like Europe if the Canadian market sees saturation.”
On target markets
The Canadian adult recreational market will provide the nearest term opportunity for growing sales for Aurora Cannabis. The company is especially keen to expand into derivative consumables such as vapes and edibles — which Canada is expected to permit beginning in December — in hopes that these forms of cannabis will both “attract a broader customer base” (i.e. boost revenue) and also command higher average selling prices (i.e. increase profits).
A lot has already been written about the Canadian cannabis industry since legalization occurred on October 17 — and even before. In Mattson’s report, we just want to highlight one tidbit that might otherwise escape notice:
According to the analyst, “ACB achieved 4 of the top 5 selling brands in British Columbia in the early weeks of adult-use cannabis legalization.” At the same time, Mattson notes that “ACB saw 20% market share from October 17th legalization.”
Do you see the disconnect here? The seller of 80% of the five top-selling marijuana brands (albeit in just one representative province) in Canada nonetheless has only 20% market share in the country. This speaks to the very fractured nature of the Canadian cannabis industry at this point in time — and explains why one of the first things Aurora began doing was rolling up some competitors and buying stakes in others, concentrating power under its own brand name.
Given the rapid rate of production growth this has helped create, Mattson thinks this was a smart move.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.