What Are Upside Catalysts For HEXO Stock? Analyst Thoughts Post Q2 Earnings

On Friday, cannabis company HEXO Corp. HEXO reported a staggering loss of CA$690.2 million ($546,94 million) for the second quarter of fiscal 2022, compared to CA$20,8 million in the same period of 2021.

The Canadian company said that its financial condition is positioned to be significantly strengthened by the proposed restructuring of the debt, allowing for access to up to approximately CA$282 million in cash.

Earlier this month, the company finalized a strategic partnership with Tilray Brands, Inc. TLRY, including a new debt financing agreement under which the Canadian cannabis giant agreed to acquire $211 million of senior secured convertible notes that HEXO initially issued to HT Investments MA LLC.

The deal brings together Canada's top two cannabis market share leaders and is expected to create efficiencies of up to CA$50 million ($39.57 million) within two years, which will be shared equally between the two entities.

Cantor Fitzgerald analyst Pablo Zuanic kept the price target of HEXO's stock unchanged following TIlray's and HEXO's partnership announcements.

The Analyst

However, on the heels of HEXO's latest earnings report, Zuanic lowered its 12-month price target to C$0.75 from C$0.90 due to reduced sales estimates and higher share count while keeping a "Neutral" rating.

The Thesis

The company reported total net revenues of CA$52.8 million, representing the second consecutive quarterly high and a 61% year-over-year increase.

However, Redecan sales dropped by 29% over the same period, while a "steep" share loss in Quebec over the past two years is evident which, the analyst said, reflects the "execution risk with this stock, the new restructuring plan notwithstanding."

Moreover, Zuanic added that the combined company has been consistently losing share, from 16% a year ago.

The plan "The Path Forward," is designed to solidify HEXO's position within the cannabis market and generate incremental cash flow of approximately $37.5 million in fiscal 2022 and an additional anticipated and approximate $135 million in fiscal 2023 for a total of $175 million over the two years, from a combination of cost reductions and anticipated organic revenue growth.

After announcing that it plans to reduce its selling, general, and administrative expenses by approximately 30% by the end of fiscal 2023, HEXO revealed in February that it was cutting 180 jobs, mainly related to the previously announced closure of its Stellarton facility, which is expected to result in annual savings of approximately $15 million on an annualized basis.

Zuanic said the stock could have "meaningful upside" if the company's new management team executes its plans, and if Tilray decides "not to convert into equity the convertible notes it has acquired once the stock crosses the C$0.90 conversion price and buys the entire float at the same time.

"Those are two big 'ifs' that keep us sidelined for now," Zuanic added.

"The only question now is when will Tilray feel emboldened enough (from a regulatory perspective) to buy all the HEXO float," Zuanic said earlier, adding that he only can say 'Chapeau!' to Tilray's chairman and CEO Irwin Simon.

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