Will HEXO's Stock Rerate Over Time Despite Plunge In Price?

Last week, HEXO Corp. HEXO HEXO announced the pricing of a previously announced overnight marketed public offering of its 47.46 million units at a price of $2.95 per unit.

The Canadian cannabis producer said it plans to utilize the total proceeds of $140 million from the offering to fund the purchase price payable to the Redecan shareholders on the closing of the acquisition and for expenditures related to its U.S. expansion plans.

On Friday, Hexo’s shares were down 28%.

The Analyst

Cantor Fitzgerald’s Pablo Zuanic reaffirmed a “Neutral” rating on the stock, lowering its price target to CA$3.40 from CA$10 to address sectoral derating, increased share count and reduced visibility.

The Investment Thesis

“As a result of this transaction, we calculate the new proforma common share count at ~270 million,” Zuanic said.

Taking into considerating major deals the company is either wrapped up or has entered into over the past year, including $235 million worth acquisition of Zenabis Global Inc. ZENA and a deal to acquire family-owned Canadian cannabis producer Redecan for $925 million in cash and stock, Zuanic said, “on a proforma basis, HEXO should be the largest Canadian cannabis seller.”

The analyst did nevertheless remain Neutral on the stock, although recognizing that “the valuation is seemingly attractive at 3.3x our CY22 proforma sales estimates vs. most comparable peers trading in the 7-12x rang.”

And, while the company said that the proceeds would be used in part to pay the cash portion of the Redecan deal and as funding for the U.S. expansion, Zuanic questions “how much of the proceeds will go to fund the U.S. plans.”

On Friday, HEXO CEO Sebastien St-Louis revealed in an interview with BNN Bloomberg that the company is looking to acquire some assets in California, clarifying that the goal is “is not to buy an MSO.”

Despite a drop in net sales to $23 million in the third quarter from $33 million in the previous period, the analyst expects “a recovery in company sales as stores reopen post COVID-related shutdowns (to in-store traffic), and as the boards start to rebuild inventories."

Zuanic also thinks that the stock could “rerate over time” when investors realize “the scale and prowess of the combined company,” and when the company begins to report positive EBITDA in the 2022 fiscal year, in addition to getting more information regarding its U.S. strategy.

Price Action

HEXO’s shares traded 6.90% higher at $ 2.48 per share at the time of writing Monday early afternoon.

Photo: Courtesy of Nicholas Cappello on Unsplash