Aurora Earnings: Financial Results and Share Dilution Within Our Expectations

No-moat Aurora’s ACB fiscal first-quarter results were largely in line with our expectations, highlighted by decent revenue growth and continuation of positive albeit small, adjusted EBITDA. Although dilution of existing shareholders continued, it was largely within our forecast, so we don’t expect a major change to our fair value estimates of $2.30 and CAD 3.00 per share outside of the effect of currency exchange rates. Shares trade well below our fair value estimates, but we re-emphasize our Extreme Uncertainty Rating amid the threat of material value destruction. We see better risk-adjusted upside in U.S. multistate operator stocks, both from exposure to more favorable legal American markets as well as a lower risk of value destruction.

Financial results were decent, with net revenue growing 17% sequentially to CAD 75 million. Growth in medical cannabis sales, mostly from higher volumes to Australia, and the continued growth of plant propagation offset declines in adult-use cannabis revenue. Cannabis gross margin expanded 200 basis points sequentially to 53%. However, companywide gross margin declined 400 basis points sequentially to 44%, entirely driven by plant propagation. However, this business tends to be seasonal, so we are not concerned for now as margins should recover later this fiscal year.

Share count grew 6% during the quarter, as it dealt with near-term maturities of convertible debt. As we’ve stated before, the continued issuance of equity below intrinsic value destroys value for existing shareholders. However, the increase is within our forecast for shares to increase by mid-teen percentage for the year, so we don’t expect an impact on our fair value estimate.

Although we don’t think the plant propagation business has a moat, it at least gives Aurora additional revenue as it tries to scale against overhead expenses. Like other Canadian producers we cover, the company’s turned outside of cannabis to drive profitability sooner.