Hexo Analysts React To Resignation Of Cannabis Company's CFO: 'What Don't We Know?'

HEXO Corp. HEXO HEXO announced Friday that Chief Financial Officer Michael Monahan is resigning due to family reasons. 

"Since joining HEXO Corp, it has become apparent that this job requires me to spend the majority of my time in Gatineau and in Ottawa. During this phase of rapid expansion, the chief financial officer should be working very closely with all team members, in person," Monahan said in a statement. 

"This isn’t possible for me at this time given my family’s needs and so I have decided to resign. I’ve had a very rewarding time at HEXO and I will continue to assist the company as a consultant to ensure a smooth transition.” 

Hexo's current vice-president of strategic finance, Stephen Burwash, will take on the role of CEO, the company said. 

The Analysts

Bank of America Merril Lynch analyst Christopher Carey downgraded Hexo from Underperform from Buy and lowered the price target to CA$9 ($6.76) to CA$4 ($3.01). 

MKM Partners analyst Bill Kirk reiterated a Buy rating with a CA$12 ($9.02) price target.

Resignation Unravels BofA's Thesis

It is reasonable to assume that Monahan wasn’t aware of the real status of development of the corporate finance organization when he accepted the position, Carey said in a Monday note. 

A resignation so abrupt from someone who has CFO experience at other public companies is worrisome and could cause investors to wonder “what don’t we know?” for a while, the analyst said. 

“Big picture: while there were already risks for Hexo, we felt they were balanced by a sound core operation and a new CFO who had a chance to regain Street credibility on forecasts/guidance by resetting the bar, with the potential that momentum regained in CQ120 with the launch of value-add formats,” Carey said, adding that the broader thesis is no longer valid after Monahan's resignation. 

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MKM Remains Bullish

The abrupt nature of the announcement will likely lead to stock weakness, but there is no cause for alarm, Kirk said in a Monday note. 

HEXO still has the “best chance of creating a defensible brand,” the analyst said.

The company's partnership with Molson Coors Brewing Co TAP should prosper when edibles become permissible in Canada later this year, he said. 

“While we believe most estimates are likely too high in the sector, in our view the consensus is not crediting HEXO with its stated goal of $C400mn in 2020 net sales.”  

Price Action

Hexo shares were down 4.19% at $3.89 at the time of publication Monday. 

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Photo courtesy of Hexo Corp.