What Makes Upside Potential For Hexo? Analyst Explains On Heels Of The Deal Break With Molson Coors

Year-to-date, Hexo HEXO shares lost 77.15%, compared to AdvisorShares Pure Cannabis ETF YOLO which went down 61.12%, and AdvisorShares Pure US Cannabis ETF MSOS, which dropped 53.70%.

Recently, the multinational drink and brewing company Molson Coors TAP said goodbye to cannabis and its partnership with Hexo. The two companies, via a joint venture dubbed Truss CBD USA, collaborated together for more than two years. Now, Molson Coors decided to pull out, due to uncertainty around the federal legalization of cannabis.

At the beginning of November, Hexo reported FY22 net revenue of CA$191.1 million ($141.2 million), a 54% increase compared to CA$123.8 million in FY21. This increase is mainly attributable to the acquisitions of Redecan and Zenabis, which contributed CA$60.3 million and CA$30.8 million of net revenue in FY22, respectively. Excluding the impact of business acquisitions, net revenues have declined by 19%.

The Analyst

Cantor Fitzgerald’s Pablo Zuanic kept a ‘Neutral’ rating on Hexo stock and reduced the price target to CA$0.26 from CA$0.35.

The Thesis

Reduction of the price target is due to higher share count and reduced estimates, Zuanic said in his Wednesday analyst note.

The Canadian cannabis company is scheduled to report October quarter financial results in mid-December. Hifyre data suggests a 14% drop in sales for the period.

“That said, we realize HEXO is undergoing a transition, with new management focusing the organization, cutting costs, shoring up the balance sheet, and expanding distribution and ramping product innovation. The company’s Redecan unit and leadership in QB are among the company’s crown jewels, in our view,” the analyst said.

Hexo’s strategic relationship with Tilray TLRY brings synergies in the short term and removes optionality in the longer term. If Tilray decides to choose all the free float quickly after the stock crosses the CA$0.90 conversion price of the senior convertible debt it has acquired, the upside for Hexo could be capped, Zuanic said.

“ All that said, most likely it will take 2-3 years, we think, for Tilray to pull the trigger (to mitigate regulatory risk), so Hexo shareholders may enjoy greater upside than the high teens return implied by the conversion price.”

The analyst concluded by taking a sidelined position, but acknowledging the potential upside if management delivers on its targets.

The Price Action 

Hexo shares closed Wednesday market session 0.48% higher at 17 cents per share. 

Photo: Courtesy of Tim Foster on Unsplash