Aurora Cannabis: Ontario Wasn’t The Savior

Article by Stone Fox Capital, Seeking Alpha

Long Ideas | Consumer | Canada Aurora Cannabis: Ontario Wasn't The Savior Jul. 1, 2019 3:42 PM ET|64 comments | About: Aurora Cannabis Inc. (ACB), Includes: CGC Stone Fox Capital Stone Fox Capital Long/short equity, growth at reasonable price, research analyst, Deep Value Stone Fox Capital (19,949 followers) Summary Ontario store openings on April 1 didn't save the Canadian cannabis industry. The industry now has dried cannabis supply to match 24 months of sales. Aurora Cannabis is the biggest contributor to oversupply with June quarter inventory jumping 150% to 25,000 kgs. The corporate target of reaching adjusted EBITDA positive in FQ4 is predicted to miss with C$3 million loss in the best scenario.

For months now, Canadian cannabis investors have pointed towards the opening of physical stones in Ontario on April 1 as a solution to the stalling sales problem. The issue is most impactful to Aurora Cannabis (ACB) due to their large focus on building up their production operations. My investment thesis has long warned of the coming flood of supply, and the April Health Canada report supports my bearish thesis on supply and discredits the theory of a large bump in demand.

Big Inventory Boost

The market wants to focus on the 16% gain in dried cannabis sales during April while ignoring the mounting inventory issues. Sales had stalled in the 7,000 kg range since November when recreational sales were legalized so the increase in sales to 8,853 kg was a move in the right direction.

Ontario didn’t approve the opening of physical locations until April 1. The province only approved 25 stores and only about half those stores were open at the first of the month. The theory remains that sales will grow as additional stores are opened.

The problem here isn’t the doubt that sales would eventually start growing as more stores open and Cannabis 2.0 launches in mid-December. The problem is that the market is going to be flooded with supply by the time all these stores open.

For April, Health Canada reported that dried flower inventory surged by ~41,000 kgs. The March inventory level only jumped by 30,000 kgs to show how supply is really starting to ramp up.

The market still lacks finished inventory, but this number is clearly a mix of operator desire to convert finished product into inventory due to a lack of demand. The Canadian cannabis industry has had nearly 100,000 kgs in unfinished inventory from the start of recreational legalization back in October providing ample time to convert the product into finished inventory.

The big issue is that total inventory of dried cannabis held by cultivators, processors, distributors, and retailers at the end of April stood at an incredible 216,000 kgs. The industry has over 24 months of supply even based on the boosted April sales. The supply amount actually grew from below 23 months before Ontario stores came online.

The cannabis oil market is in a similar oversupply situation with a much larger percentage of inventory in finished supplies. The oil sector only saw a modest 3.5% boost in April with sales levels hardly topping the 7,914 liters sold in January.

The oil segment appears to disprove the bull case that a lack of inventories is holding back cannabis sales. The industry has over 62,000 liters of cannabis oil available for sale, yet sales are nearly flat and inventories continue to rise.

In a similar manner to dried flower, cannabis oil has total inventories of 120,000 liters equal to 14.6 months’ worth of April sales.

Oncoming Flood

This is where investors need to be reminded that Aurora Cannabis forecasts supplies to surge in the June quarter. The company forecast cannabis inventory rising above 25,000 kgs in the June quarter, up from production of only 15,590 kgs in the March quarter. In addition, annualized production run rate reached in excess 150,000 kg in May suggesting inventory available for the September quarter in excess of 37,500 kg.

Clearly, Aurora Cannabis is contributing to the big jump in the April dried flower inventory jump. The company stated that some of their inventory would be held back in unfinished inventory to utilize for edibles and vapes when Cannabis 2.0 starts at year end.

Read the full article here.

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