More dilution could be on the way for beleaguered shareholders of Aurora Cannabis (ACB). The company gave note of a preliminary prospectus, which over the next 25 months authorizes the Canadian cannabis player to issue up to US$500 million in securities. The prospectus also noted exhaustion of the company's ATM, through which it has raised gross proceeds of US$214.7 million since its fiscal fourth quarter.
Aurora might have all sorts of issues, but it is an expert at issuing shares. Over the past 6 years, the share count has increased by almost 9,250%.
Jefferies analyst Owen Bennett is not surprised by the latest attempt to pad the coffers, having already argued post Aurora’s September business update and then again following the company’s F4Q results, that in order to support near-term operations and debt obligations, Aurora would exhaust its ATM and require further raises.
However, the analyst is taken back by one aspect of the raise.
“What is surprising is the size of the possible raise and the dilution that comes with this. Exhaustion of the ATM would have already represented c26% dilution, while full use of the US$500mn would be an additional c50% based on the current share price,” the analyst noted.
That said, Bennett does count several positives the unwelcome surprise offers.
“First,” he says, “The news is now out of the way, and by announcing such a large number there is unlikely to be any more surprises.”
Secondly, while Aurora is expected to turn EBITDA positive this year, Bennett notes that without an additional raise it was “at risk of under investing in the business.” The money should go toward supporting its top line in Canada, where Aurora still “has a very strong brand and product portfolio,” while its European and, particularly, German investments could get an injection, too.
Lastly, and most importantly, with potential federal legislation looming across the border, the money could be well spent in the U.S.
“It needs to establish a strong CBD business (and US infrastructure) ahead of this, and then be prepared to invest in cannabis if any laws change,” Bennett opined. “With most institutional money likely to be focused on US names should we see legalisation, if Canadian names can't argue a strong case for competitiveness, they may struggle to catch a bid.”
Overall, there’s no change to Bennett’s rating which stays a Hold, while the C$6.90 (US$5.24) price target suggests possible upside of 24%. (To watch Bennett’s track record, click here)
Barring 1 Buy rating, all 13 other analysts to have posted an Aurora review over the past 3 months are on the same page as Bennett and also say Hold. However, they might as well have said Buy as the C$9.30 (US$6.99) average price target implies upside of 83% over the next 12 months. (See ACB stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.