Analyst Touts 'Key Underlying Improvements' For HEXO Despite Q1 Revenue Drop

Hexo Corp. HEXO reported a 29% year-over-year and 16% sequential decrease in net revenue to CA$ 35.8 million ($26.3 million) in the first quarter of fiscal 2023.

Still, Hexo CEO Charlie Bowman touted the quarter as “one of incredible progress" where the results of a "strategic realignment" served as a "reset" for long-term success.

Cantor Fitzgerald’s analyst Pablo Zuanic pointed out in his latest note a 15% drop in HEXO share’s price on Thursday, following the release of the quarterly financials, attributing it to a sales miss.

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However, he said that the report does signal improvement in the company’s performance.

The Analyst: Zuanic retained a 'Neutral' rating on the company’s stock while lowering his price target to CA$0.25 from CA$0.26 on reduced estimates.

The Thesis: The analyst highlighted there are “key underlying improvements (rev/gram, gross margins, adj EBITDA trends, besides portfolio improvements and shoring up the balance sheet) and was partly distorted by one-offs.”

The company recorded an adjusted EBITDA loss of CA$ 598,000, an improvement of CA$ 6.9 million from the fourth quarter of fiscal 2022, and an improvement of CA$ 11 million year-over-year.

Total gross margin, before adjustments, has improved to 24% from 12% quarter over quarter, partly due to certain inefficiencies recognized in the fourth quarter of 2022 due to the consolidation of operations and facility closure.

Meanwhile, even though the management didn’t provide guidance, the company touted progress with its transformation strategy, including improvement in cultivation, the launch of more premium lines, lower selling, general and administrative expenses as well as consolidation of the balance sheet, Zuanic said.

Hexo/Tilray Partnership

The analyst also gave additional insight into the previously announced strategic partnership between Hexo and Tilray Brands, Inc TLRY.

“One would think over time HEXO shares could see a narrowing of the valuation gap with TLRY (1.2x vs. 4.2x on CY23 sales),” Zuanic said. “But that upside could be capped if Tilray decides to buy all the free float soon after the stock crosses the C$0.40 conversion price of the senior convertible debt it has acquired (and takes control of the company, presumably delisting it after buying all the float).”

The Canadian cannabis giant entered into a debt financing agreement with Hexo, under which it agreed to acquire $211 million of senior secured convertible notes that Hexo initially issued to HT Investments MA LLC in March.

Shortly after, Tilray signed a definitive agreement to purchase 100% of the remaining US$193 million outstanding principal balance of the senior secured convertible note.

Price Action

Hexo’s shares traded 18.37% lower at $0.1275 per share at the market close on Thursday.

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