Medical marijuana bargain stock offers value

Many financial analysts will argue that medical marijuana producers are bargain stocks today. But one such bargain stock that Mackie Research analyst Greg McLeish recommends is a bargain that he views as an attractive investment.

Medical_MarijuanaVancouver-based Aurora Cannabis Inc.’s (TSX—ACB) fourth-quarter fiscal 2017 results pleased Toronto-based Mackie Research analyst Greg McLeish even though they slightly missed his expectations for revenue and earnings.

Adding to his sunny outlook on this medical marijuana healthcare stock, he says, is construction on its 800,000-square-foot Aurora Sky cannabis production facility at the Edmonton airport which is fully underway and on schedule. Meanwhile, the company has surpassed the milestone of 20,000 active registered patients. Furthermore, its pursuit of international markets continues.

Accordingly, Mr. McLeish says he continues to view Aurora as an attractive investment. He maintains his ‘buy’ recommendation and $3.80 target share price.

To arrive at this target price, he applied a multiple of 10 to his 2020 estimate for EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization) and then discounted the result at a rate of 20 per cent.

In Aurora’s fiscal 2017 fourth quarter (period ended June 30, 2017), revenue was $5.9 million versus the analyst’s $6.5-million forecast. Also, a net loss of -$0.01 per share was comparable to his forecast of $0.00 per share.

Still, the analyst is bullish about Aurora’s prospects because of advancements in its operations.

The total cost of the Aurora Sky facility is estimated to be more than $110 million, and management estimates that it will be able to produce more than 100,000 kilograms of cannabis yearly. The company broke ground in November 2016, and to date, it has erected 290,000 square feet of greenhouse structure—80 per cent of which has glass fully installed.

Acquisitions made in Australia and Germany

Outside Canada, management suggests that international expansion is fundamental to its long-term growth. It bought a 19.9-per-cent stake in Cann Group of Australia and fully acquired Pedanios GmbH of Germany. On Sept. 18, the company shipped 50 kilograms of dried cannabis to Berlin-based Pedanios.

Aurora announced that it finished the fiscal year with 16,400 active registered medical marijuana patients. This was up 25 per cent quarter-over-quarter and up 264 per cent year-over-year.

The company has increased efficiency in the lab, lowering production costs, while raising its sale price per dried gram equivalent (DGE) of cannabis product.

During the fiscal fourth quarter, the company sold 755,059 DGE of cannabis and cannabis oils, six per cent more than Mr. McLeish predicted. Its cash cost to produce each gram of dried cannabis declined to $1.91 per gram compared to $2.13 per gram in the second quarter, and $3.89 per gram in the first.

At present, the company normally charges $9 per gram of dried marijuana and $95 per bottle of oil. However, the average selling price for dried marijuana in the fourth fiscal quarter was $7.45 per gram, up from $6.64 per gram in the previous quarter, and $6.09 per gram in the same period last year.

However, the average was slightly lower than the analyst’s $8.25 per-gram forecast. He attributes the miss to a higher percentage of medical marijuana patients that qualified for compassionate pricing.

Compassionate pricing programs allow low-income households and patients on provincial or federal assistance programs access to medical marijuana priced at $6 per gram and $65 per 30-millilitre bottle of cannabis oil. In 2017, 30 per cent of patients purchased medical cannabis through such programs.

Aurora Cannabis is one of Canada’s largest producers of medical marijuana.

 

This is an edited version of an article that was originally published for subscribers in the November 3, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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