Aurora Cannabis Analysts On Pros, Cons Of Entry Into US CBD Market

Aurora Cannabis Inc ACB shares are on a roll yet again, this time in reaction to its announcement that it is entering the U.S. market through an M&A deal. 

The Aurora Cannabis Analysts

Cantor Fitzgerald analyst Pablo Zuanic maintained an Overweight rating on Aurora shares and hiked the price target from CA$22 ($15.77) to CA$27 ($19.36). 

Needham analyst Matt McGinley has a Hold rating on the shares.

Cowen analyst Vivien Azer maintained a Market Perform rating and CA$11 ($7.89) price target.

Cantor Sees Top-, Bottom-Line Synergies At Aurora 

The Reliva deal is an EBITDA accretive one, and is reasonably priced, relative to other deals, Zuanic said in a note. 
Reliva generated $14 million in sales for the 12 months ended in February and has been growing, the analyst said. The company sells mostly through the convenience store brick-and-mortar channel, with a limited online presence, and sells various formats such as ingestibles and topicals/rubs, he said. 

The consumer CBD industry in the U.S., though facing temporary challenges, holds long-term upside, Zuanic said.

The analyst is of the view that Reliva has a unique channel and price positioning that allowed the company to perform well ahead of the COVID-19 pandemic.

Among the other tangibles stemming from the deal are the strengthening of the Aurora Cannabis senior management bench, useful global connections and reinvigoration of the company's alliance with the UFC, he said. 

"We see top-line and bottomline synergies, even in CBD, with tony Lord Jones complementing mass-CBD brand Reliva." 

Cantor also sees other licensed producers following the footsteps of Aurora, which Zuanic said should bode well for CBD stock valuations.

See also: Aurora Cannabis Shares Soar On Sales Beat: 'A Case Of The Patient Being Presumed Dead, When Indeed It's Not'

Needham Says Aurora Deal Provides Access To Rapidly Growing CBD Category

The Reliva deal is a small one, unlikely materially altering Aurora's overall trajectory in fiscal year 2021, Needham analyst McGinley said. However, the analyst sees the deal providing a toehold in the U.S. CBD category.

"Given Reliva is a stand-alone asset light model, and deal terms are equity-based with a large performance-based component, the downside is another US$40mn in equity dilution while the upside is access to a small part of a nascent, but rapidly growing CBD category," the analyst said. 

Needham said the deal will be accretive, but the accretion is not large enough to "bail out" the company if it struggles to reach its FY21 profitability covenants.

Aurora is by no means "out of the woods" in terms of overcoming structural issues with the Canadian cannabis market that all LPs face, McGinley said. 

The analyst said it believes the company's fate is still tied to Canada at this point, and this acquisition could be reflecting either confidence that trends are improving or a negative signal that the company is losing focus on the only business that matters. 

Cowen On Aurora's Long-Awaited US Entry  

Aurora's Reliva deal represented its long-awaited entry into the U.S., following similar moves by Canopy Growth Corp CGC, Cronos Group Inc CRON and Tilray Inc TLRY, and consistent with its commentary over the past year, Cowen analyst Azer said.

The acquisition provides the company the ability to start building its infrastructure to capitalize on the potential for a more benign FDA environment on CBD and THC legislation that makes it federally permissible to operate domestically.

The company also plans to leverage the business and expand internationally using its existing footprint, she said. 

"The deal structure also allows ACB to make the investment while protecting its cash while providing performance-based incentives to Reliva."

ACB Price Action

Aurora Cannabis shares were soaring 22.82% to $15.66 at the time of publication Thursday. 

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