All comments and likes are very appreciated.
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Fair Value and Profit Drivers |
Our fair value estimate for Aurora is $6 per share, assuming a 1.33 CAD to U.S. dollar exchange rate as of Feb. 13 and based on a DCF with a 10-year explicit forecast.
We forecast Canadian medical volume to decline about 3% per year on average from fiscal year 2020 to 2029 as consumers shift to the recently legalized recreational market. We forecast recreational volume to rise about 15% per year on average as distribution expands, consumers convert from the black market, and non-consumers become consumers. We forecast prices will grow about 2% per year on average as capacity will rise adequately to meet demand.
We forecast about 18% average annual volume growth for Aurora’s international medical business amid wider legalization and distribution. Our volume forecast is muted by the emergence of cheaper suppliers in lower cost labor countries; however, Aurora’s production expansion into some of these countries helps protect its share. We forecast prices will rise roughly 3.5% per year on average, as it will take time before lower cost producers can effectively compete.
We expect the company’s operating margin excluding mark-to-market plant items will become positive by fiscal 2022. By 2029, we expect that margin to reach about 35%, due to the full-ramp up of production and fixed cost leverage against overhead expenses.
We forecast Aurora to reach positive free cash flow generation in 2023, as capital expenditures remain high in the near-term to fund capacity expansion. On average, we forecast capital expenditures 23% of sales through our 10-year forecast period and falling to about 8% by 2029, as we think Aurora has frontloaded capacity expansion through investments and acquisition. This will allow capital expenditures to fall rapidly while still allowing Aurora to meet demand growth.
We assume a cost of equity of 7.5%, reflecting the low cyclicality of revenue, our forecast 35% operating margin, and low operating and financial leverage.
Risk and Uncertainty |
As a cannabis producer, Aurora faces numerous risks, largely around regulation. However, it faces additional investing risk relative to its Canadian peers.
The most important risk is the pace and status of legalization, which determines when and where cannabis can be legally sold. Aurora’s home market of Canada has already legalized recreational cannabis, so U.S. legalization remains uncertain.
Aurora does not operate in the U.S. and is focusing on the Canadian and international markets instead. As such, the impact is minimal. However, peers with better U.S. exposure have more potential upside as a result. Current laws make it virtually impossible to operate a cannabis company in both the U.S. and Canada, excluding hemp-derived CBD. Although there is growing public support for legalization, it is politically divisive, with most Republican support coming only in the form of state’s rights. This poses a risk for federal legalization and adoption of recreational cannabis.
Regulation around supply is also a risk. Businesses must be licensed by governments to operate cultivation and dispensaries, with licenses specifying production levels. However, governments have at times expanded too slowly or too quickly.
Another risk is the black market. Years of government efforts have done little to stem illegal cannabis, but a change to the ease of accessing black market supply could impact pricing power and thus profitability.
In addition to operational risks, Aurora also faces significant financial risk. The company has yet to generate positive free cash flow. Unlike its peers that have funding backstops through their deep-pocketed strategic investors, Aurora has higher dependence on capital markets. There is material risk that Aurora would need to issue incredibly dilutive equity to fund itself amid ongoing cash burn. For example, Aurora had to offer dilutive terms to satisfy convertible notes holders and issue stock at low prices through its at-the-market equity issuance program.
I and/or others I advise hold a material investment in the issuer's securities.
_________________________________________________________________________________________________________________
All comments and likes are very appreciated.
Best Regards,
I0_USD_of_Warren_Buffet
_________________________________________________________________________________________________________________
Fair Value and Profit Drivers |
Our fair value estimate for Aurora is $6 per share, assuming a 1.33 CAD to U.S. dollar exchange rate as of Feb. 13 and based on a DCF with a 10-year explicit forecast.
We forecast Canadian medical volume to decline about 3% per year on average from fiscal year 2020 to 2029 as consumers shift to the recently legalized recreational market. We forecast recreational volume to rise about 15% per year on average as distribution expands, consumers convert from the black market, and non-consumers become consumers. We forecast prices will grow about 2% per year on average as capacity will rise adequately to meet demand.
We forecast about 18% average annual volume growth for Aurora’s international medical business amid wider legalization and distribution. Our volume forecast is muted by the emergence of cheaper suppliers in lower cost labor countries; however, Aurora’s production expansion into some of these countries helps protect its share. We forecast prices will rise roughly 3.5% per year on average, as it will take time before lower cost producers can effectively compete.
We expect the company’s operating margin excluding mark-to-market plant items will become positive by fiscal 2022. By 2029, we expect that margin to reach about 35%, due to the full-ramp up of production and fixed cost leverage against overhead expenses.
We forecast Aurora to reach positive free cash flow generation in 2023, as capital expenditures remain high in the near-term to fund capacity expansion. On average, we forecast capital expenditures 23% of sales through our 10-year forecast period and falling to about 8% by 2029, as we think Aurora has frontloaded capacity expansion through investments and acquisition. This will allow capital expenditures to fall rapidly while still allowing Aurora to meet demand growth.
We assume a cost of equity of 7.5%, reflecting the low cyclicality of revenue, our forecast 35% operating margin, and low operating and financial leverage.
Risk and Uncertainty |
As a cannabis producer, Aurora faces numerous risks, largely around regulation. However, it faces additional investing risk relative to its Canadian peers.
The most important risk is the pace and status of legalization, which determines when and where cannabis can be legally sold. Aurora’s home market of Canada has already legalized recreational cannabis, so U.S. legalization remains uncertain.
Aurora does not operate in the U.S. and is focusing on the Canadian and international markets instead. As such, the impact is minimal. However, peers with better U.S. exposure have more potential upside as a result. Current laws make it virtually impossible to operate a cannabis company in both the U.S. and Canada, excluding hemp-derived CBD. Although there is growing public support for legalization, it is politically divisive, with most Republican support coming only in the form of state’s rights. This poses a risk for federal legalization and adoption of recreational cannabis.
Regulation around supply is also a risk. Businesses must be licensed by governments to operate cultivation and dispensaries, with licenses specifying production levels. However, governments have at times expanded too slowly or too quickly.
Another risk is the black market. Years of government efforts have done little to stem illegal cannabis, but a change to the ease of accessing black market supply could impact pricing power and thus profitability.
In addition to operational risks, Aurora also faces significant financial risk. The company has yet to generate positive free cash flow. Unlike its peers that have funding backstops through their deep-pocketed strategic investors, Aurora has higher dependence on capital markets. There is material risk that Aurora would need to issue incredibly dilutive equity to fund itself amid ongoing cash burn. For example, Aurora had to offer dilutive terms to satisfy convertible notes holders and issue stock at low prices through its at-the-market equity issuance program.
I and/or others I advise hold a material investment in the issuer's securities.
_________________________________________________________________________________________________________________
All comments and likes are very appreciated.
Best Regards,
I0_USD_of_Warren_Buffet