Was Aurora’s Bevo Farms Deal Worth it for CAD$45 Million? What to Expect at The Upcoming Q4 Results

These last few weeks have been a busy period for the Edmonton headquartered weed producer and retailer, Aurora Cannabis (CA:ACB, US:ACB).

On the 25th of August, Aurora announced that they had acquired the controlling interest in firm Bevo Agtech Inc, which is the sole parent of vegetable plant and floral wholesaler Bevo Farms.

The initial consideration paid for the controlling interest was CAD$45 million and up to CAD$12 million payable over the next three years subject to the company hitting certain financial milestones.

Bevo is considered to be one of the largest suppliers of propagated vegetables and ornamental plants in North America and was founded in 1986. The company currently operates 63 acres of greenhouses in British Columbia

Bevo is a profitable, cash flow positive business that has shown annual growth over the past decade through process improvements and facility expansions. Aurora’s management has also seen the potential to drive long term value to the firm’s existing cannabis business through the use of Bevo’s industry leading propagation expertise.

For the 12 month period to the 30th of June 2022, Bevo generated CAD$39 million in revenue and Adjusted EBITDA of CAD$9 million.

Aurora through the transaction purchased 50.1% of Bevo’s outstanding shares and will take a controlling position on the company’s Board while financially consolidating the company.

Bevo’s existing management team will continue to be significant shareholders in the company and will continue to work for the organisation while embarking on a robust growth plan.

Aurora’s CEO Miguel Martin commented on the transaction stating, “We expect this investment and collaboration between industry leaders will drive significant shareholder value and synergies for both parties”

In addition to the transaction, Bevo entered into an agreement to acquire Aurora’s Sky facility in Edmonton, Alberta. Management has noted that up to CAD$25 million could be payable over time by Bevo to Aurora, based on certain milestones.

Aurora and other Cannabis stocks in general have seen weakening valuations since the beginning of 2022 due to an oversupply and falling market price sale price for the commodity.

These stocks received a boost to their prices over July when news was released, stating that the US Senate would introduce a decriminalization bill, with a report from Fintel journalists, that can be found here.

The pain could be over soon enough for Aurora’s stock price which continues to stagnate as management recently highlighted that the company remains on track to become Adjusted EBITDA positive by the end of the first half in FY23. 

In a world where rising risk free rates have materially changed the way analysts value stocks, profitable growth is rewarded over companies that continue to run at losses.

Analysts John Zamparo & Monica Lutz from CIBC Capital Markets exerted caution around the ability for ACB to meet their guidance of becoming Adj EBITDA positive in the second half of FY23, given the positive earnings from Bevo are skewed towards the second half of the year, given growing seasonality trends. CIBC remains ‘neutral’ rated on the stock with a CAD$3.75 target price.

The upcoming fourth quarter earnings are scheduled for the 20th of September after market and could provide additional colour around the outlook for Financial Year 2023.

The street is looking for Aurora to generate CAD$50.6 million for the final quarter, taking the full year to around ~CAD$222 million.

Analysts are expecting ACB to generate Adjusted EBITDA of around negative -CAD$7.6 million, which would be an improvement from the negative -CAD$12.3 million in Q3.

For FY23, analysts are now forecasting Aurora to generate positive adjusted EBITDA of ~CAD$4.7 million, following management’s commentary about becoming break-even over the year.

Despite the weaking ACB share price, options sentiment remains bullish with a Fintel put/call ratio of 0.18. This ratio is defined by the number of open call and put interest in the options market for a stock. This ratio while being bullish over the past 3 months, has strengthened with the value trending lower towards zero, suggesting call interest growth continues to outweigh put interest.

This article originally appeared on Fintel

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