$ACB - Aurora Cannabis weighs on sector after BofA downgrade highlights cash burn

Curaleaf shines on bullish analyst response to GR Cos. deal, Hexo says co-founder is stepping down as chief brand officer

Authored By CIARA LINNANE

Aurora Cannabis shares tumbled Thursday to pull the overall sector lower, after BofA Merrill Lynch downgraded the stock on concerns about its cash burn.

Aurora’s U.S.-listed shares ACB, -5.35% ACB, -5.58%  slid 7% in early trade, after analyst Christopher Carey downgraded the stock to neutral from buy and lowered his price target to $8 from $10, or about 15% above its current trading level.

“Aurora has emerged as one of the best operators in the cannabis sector, with industry leading scale and margins even versus other large peers, and global optionality,” Carey wrote in a note to clients. “However, despite this, and a focus on profit, (positive EBITDA target for the second quarter), it is burning cash and by our estimates could be cash negative by first quarter 2020 (absent financing), namely if a large convertible debenture due in the first quarter stays out of the money.”

Even if its current cash burn were to improve, Aurora will likely need funding some time in the next few quarters, said the analyst. The company has access to about C$100 million ($76 million) in a credit facility, but convertible debt of C$230 million that matures in the first quarter of 2020 will likely need to be paid in cash, barring a steep upward move in the stock, he wrote.

Aurora filed a shelf registration in April that would allow it raise up to $750 million, but that was meant to help attract a partner or speed up the process of any potential investment.

Still, the issue is not that Aurora will be unable to plug funding gaps. “At this early stage of industry development, when first mover advantage is key (be early, be big), raising capital from a defensive position rather than for untapped opportunities (like US CBD) is less ideal,” said Carey.

With U.S. expansion a stated core strategy of Aurora management, if debt is added and no partnership agreed, the company may forced to raise equity capital, clashing with management’s other stated goal of slowing the pace of equity dilution, he wrote.

“Upside risk to our call is if Aurora can ink a partnership that brings with it capital,” he said.

Curaleaf shares CURLF, +9.30% CURA, +0.00%  bucked the negative trend to trade up another 8%, as analysts weighed in on its plan to acquire Chicago-based multistate operator GR Companies Inc. for $875 million in cash and stock. The deal, which is expected to close in early 2020, will increase Curaleaf’s presence to 19 states from 12, including Illinois, which legalized adult-use cannabis in June through the legislature. The combined company will have 131 dispensary licenses, 68 operational locations, 20 cultivation sites and 26 processing facilities.

“Together, CURA should now be generating pro-forma annualized revenues of ~$350m, ~50% larger than next its closest peer, and highlighting CURA’s industry leadership position,” GMP analyst Robert Fagan wrote in a note to clients.

The combination is “highly complementary” with limited overlap, he said. Fagan rates Curaleaf a buy and raised his stock price target to C$24 ($18) from C$23, or almost three times its current price.

Akerna Corp. KERN, -3.36%  fell 6%, after the Denver-based software-as-a-service (SaaS) company focused on the cannabis industry disclosed a relatively large sale of common stock by “certain selling stockholders.”

The company late Wednesday filed a registration statement for the resale of 6,699,766 shares of common stock, in a deal that would be valued at $88.1 million at the proposed maximum offering price of $13.15 a share. Akerna will not receive any proceeds from the offering, but the number of common shares outstanding will increase by 10.8% to 11,734,570 shares.

Shares of Neptune Wellness NEPT, +13.67%  , NEPT, +12.70%  an extraction company, rose 12% after the company said it has raised $41 million in a private placement with existing and new investors led by Perceptive Advisors. The company issued a total of 9.4 million shares, priced at $4.40 each. Proceeds of the deal will be used to fund the initial payment for the acquisition of SugarLeaf Labs and Forest Remedies LLC, as well as for general corporate purposes.

Hexo Corp. shares HEXO, -3.90%  fell 4.5% after the company said co-Founder Adam Miron is stepping down from his role as chief brand officer, effective today. Miron co-founded the company with Chief Executive Sebastien St-Louis in 2013. Miron will remain on the board and will continue to be president of the board of Hexo Med, the company’s Greek unit

Elsewhere, Cronos CRON, -1.07% CRON, -1.48%  was down 2.2%, TilrayTLRY, -2.88% was down 3.3%, and Aphria shares APHA, -1.98% APHA, -2.21%were down 2.7%, Green Growth Brands Inc. GGBXF, +0.13% was up 0.6% and MedMen was down 1.4%. OrganiGram Holdings was down 7%.

The ETFMG Alternative Harvest ETF MJ, -1.63% was down 1.8%, with 26 of its 38 constituent stocks declining. The Horizons Marijuana Life Sciences ETFHMMJ, -2.03% was down 1.9%, with 38 of its 54 constituent stocks falling.