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Will Bevo Farms drag down Aurora Cannabis shares and earnings?

Shares in Aurora Cannabis have struggled in 2022. Yet speculation over whether Germany will legalise cannabis has reinvigorated analysts’ views ahead of its fourth quarter and full-year earnings call on Tuesday 20 September. The upcoming announcement will reveal whether a C$45m acquisition of Bevo Farms has dragged on earnings.    

The Aurora Cannabis [ACB.TO] share price has been hit with a wave of analyst upgrades in the weeks leading up to its third quarter earnings announcement on 20 September. Recent coverage shows that 11 analysts from MarketWatch changed the overall consensus rating for the stock from ‘sell’ to ‘hold’. Revenue estimates for the upcoming quarter come in at $39.29m, 2% lower than half-year results.

Forecasts have amicably turned as expectations for increased earnings before interests, taxes, depreciation and amortisation (EBITDA) grow following the company’s acquisition of crop production company Bevo Farms. Speculation around when Germany will legalise cannabis, which could create a market estimated at $16.6bn, is also boosting sentiment.

Despite the positive outlook, the Aurora Cannabis share price is down 70.4% year-to-date as of 15 September. The stock fell after the US Senate recently backtracked on the Cannabis Administration and Opportunity Act (CAOA) and has also been hurt by the 16% drop in revenues to $50.4m it posted for the first quarter of 2022 as well as its decision to increase its financing deal to $150m in May, which had diluted shareholders stakes.

Cannabis companies have had a difficult few months as US markets face a legislative freeze. The CAOA aimed to transfer regulation to the Department of Health and Human Services, but President Joe Biden has failed to issue critical executive orders to deschedule cannabis. The Global X Cannabis ETF [POTX] has fallen 15.6% in the past month to 15 September, alongside Aurora Cannabis’s 8.9% decline over the same period. Notably, however, index chief Canopy Growth [WEED.TO] has risen 8.8%.

Bevo Farms acquisition set to drag on earnings

In Aurora’s most recent earnings call for the three months ending 31 March, adjusted EBITDA improved by 41%, from -$20.9m to -$12.3m. This growth reflects considerable performance improvements, primarily driven through expanded gross margins and decreased expenses. CEO Miguel Martin stated that “we remain firmly on track to achieving a positive adjusted EBITDA run rate by the first half of fiscal 2023”.

Analysts agree. MarketWatch forecasts average earnings per share to rise from -$4.12 in 2022 to -$0.32 in 2023. Yet, analysts also estimated earnings for the second quarter at -$0.19. With the US legislative holdup driving down the market, earnings forecasts for the period were a distant -$0.30 per share.

The C$45m acquisition of Bevo Farms will see the company fight a financial hangover throughout the upcoming year. As legislation presumably progresses in the US and Germany, previous investment outflows may stagnate Aurora Cannabis’ ability to capitalise on emerging opportunities, while market competitors dive in. Yet the company’s cash totalled $480m in Q3 — a 20% leap from the second quarter. This suggests Aurora Cannabis possesses sufficient capital to keep afloat through the acquisition’s financial wake. 

Analyst consensus remains optimistic

The cannabis market is avidly watching Germany’s legislative movement. Health Minister Karl Lauterbach stated intentions to initiate legislation as far back as May. He has recently stressed the alignment of their market with EU law, stating it won’t be an issue. But the coalition will potentially use Canada’s relaxed regulatory model, suggesting the German market will provide a very lucrative opportunity for companies like Aurora Cannabis.  

According to seven analysts at Marketbeat, the consensus remains to ‘hold’ the stock. However, the share price target for September was forecast at CA$3.71, far higher than its 15 September closing price of CA$2.03. Targets may have been missed as the CAOA came to an abrupt halt. Yet analysts remain optimistic as speculation of Germany’s market, and the company’s improved EBITDA, have elevated forecasts just prior to the earnings report. 

With the potential for an EBITDA spike resulting from the acquisition of Bevo Farms, investors will be hoping that Aurora Cannabis can still post a positive performance. As stated by Miguel Martin, turning the earnings around is a key pillar of the company’s focus going into next year. Such an achievement has already progressed to an extent. As hopes for legislative progress and acquisition gains mount, Aurora Cannabis’ analysts have rallied both call positions and target prices.

 

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