It's been a couple of weeks now since Canadian marijuana producer Aurora Cannabis (ACB) announced its appointment of Nelson Peltz, CEO and Founding Partner of investment management firm Trian Fund Management, L.P., to be its new "Strategic Advisor." When that news broke, it sent Aurora Cannabis shares up 14% in a day.
Cowen's Vivien Azer thinks that was the right reaction, reiterating an Outperform rating on ACB stock with a C$14.00, which implies about 15% upside from current levels. (To watch Azer's track record, click here)
Viewing the news of Nelson Peltz's appointment in light of revelations gleaned from recent investor meetings with Aurora Chief Corporate Officer Cam Battley, Azer opines that it sees both parties benefiting from this partnership. From Aurora's perspective, of course, it's hiring an advisor with deep knowledge of the consumer packaged goods (CPG) industry, and numerous contacts with decision-makers, formed over decades of deal-making -- but this association is good for Peltz as well.
The reason: Azer explains that Aurora has a lot of potential to grow and profit as the (legal) marijuana industry matures. And as it does so, Peltz stands to make a pretty penny off of the 20 million stock options that Aurora is awarding him as incentive to give good advice.
Why does Azer think this? Consider:
The final quarter of last calendar year (Aurora's Q2 2019) saw the company produce 7,800 kilograms of cannabis, "the highest level of kilograms produced among" Canadian licensed producers of the drug. Aurora's production even exceeded that of Canadian rival Canopy Growth (CGC), albeit the latter commands a market capitalization 68% higher than Aurora's $9.1 billion market cap. Furthermore, Aurora reached this higher level of production "despite having a significantly smaller amount of licensed square footage" in which to grow weed.
At a minimum, this suggests that Aurora is a more efficient producer than its rival. It probably helps, explains Azer, that Aurora focuses on growing its cannabis indoors. As the analyst explains, "using indoor grows will become a competitive advantage as it will allow the company to minimize crop losses compared to greenhouse or outdoor grows."
Such production efficiencies could also help Aurora to become a more profitable pot producer. Currently, Azer estimates that it costs Aurora C$1.92 to grow a gram of salable marijuana. But as production increases and efficiencies save on costs, the analyst sees this cost-per-gram falling to under C$1.
Lower costs will lead to even higher profit margins for Aurora, says Azer -- indeed, "industry-leading gross margins." And when you consider that Aurora already reaps 61% gross margins on its product (versus 48% margins for Cronos, for example, or 29% margins for Canopy), this is saying a lot.
Assuming Aurora succeeds in growing quarterly production to 12,000 kg in Q3, and 25,000 in Q4, the company is on track to produce 500,000 kg -- that's 500 metric tons -- of weed annually by mid-2020. Azer expects this to translate into as much as C$742 million in sales that year, and if Aurora maintains this growth trajectory, nearly double that by 2022 -- C$1.3 billion, and $413 million in EBITDA to boot.
That's reason enough for Azer to get excited -- and good reason for Nelson Peltz to do his level best to help Aurora meet its goals.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
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