HEXO Corp is still a pass, says ATB Capital
Frederico Gomes, analyst at ATB Capital Markets, is pleased with the progress made by HEXO Corp. (HEXO Corp Stock Quote, Chart, News TSX:HEXO), upgrading its rating from “Underperform” to “Sector Perform” and raising its target price from $0.80/share to $1.10/share, the objective implying a 45% return in an update to clients on Thursday.
Founded in 2013 as The Hydropothecary Corporation and headquartered in Gatineau, Quebec, HEXO Corp is a cannabis producer, distributor and retailer offering its adult and medical products under the HEXO brand, cannabis beverages under the Little Victory , House of Terpenes, Mollo, Veryvell and XMG brands, and cannabis products under the UP Cannabis, Original Stash and Up brands.
Gomes’ latest analysis comes after HEXO announced a partnership deal with Tilray Brands.
“We believe the agreement is positive for HEXO shareholders as it significantly reduces the company’s balance sheet risks, removes the going concern excess on shares and provides additional cash to execute the plan” The Path Forward,'” said Gomes, who noted his shift in focus came from lowering the discount rate on the stock from 18% to 14%.
Under the terms of the agreement, Tilray has agreed to acquire up to US$211 million of HEXO Senior Secured Convertible Notes held by HT Investments. If the transaction is completed, the Notes will be amended to fix a conversion price of C$0.90/share, which represents approximately 37% of the ownership of the basic shares of HEXO in the event of conversion. The agreement would also extend the maturity of the three-year notes to May 1, 2026 and bear 10% annual interest, to be paid entirely in cash during the first year and half in cash during the remaining period, the remaining part to be paid in cash or in shares at maturity or on conversion.
“HEXO’s debt restructuring is an essential first step in enabling the company to move forward with its Path Forward strategy and begin to unlock meaningful shareholder value,” said Mark Attanasio, Chairman of the HEXO Board of Directors in the company’s March 2 press release. . “The company has suffered a crippling overhang over the past twelve months, due to punitive takeovers and discounted dilutive financings, and we needed to resolve this issue in order to make positive progress. This new agreement accomplishes that and puts HEXO firmly on the growth path.
As part of the agreement, HEXO will have access to US$80 million in cash that is currently restricted on its balance sheet. The two companies expect to save up to $50 million from cost synergies, which would be split equally, and the savings would come from cultivation and processing services, certain cannabis 2.0 products and the creation of a joint venture to provide services to both companies.
“We believe the proposed transaction is a win-win solution for Tilray Brands and HEXO, as it would launch a strategic partnership between two leading Canadian cannabis producers with complementary brand portfolios,” said Irwin D. Simon, President and CEO. from the management of Tilray Brands. “For us, this paves the way for meaningful future ownership in HEXO and allows us to participate in HEXO’s share price appreciation as it continues to implement its growth initiatives.”
HEXO has also reached an agreement with KAOS Capital for a $180 million safety net in the form of monthly subscriptions of $5 million for 36 months, issued at a 10% discount from the 20-day VWAP at the when the request is made.
Despite the target increase, Gomes hasn’t changed the majority of his financial estimates. From a revenue perspective, after the company ended its 2022 fiscal year at $235.7 million, Gomes forecasts an increase to $307.2 million in 2023 for a potential 30.3% one-year increase. on the other. Looking to 2024, Gomes forecast another jump to $392.7 million, suggesting a 27.8% year-over-year increase.
Meanwhile, after reporting a loss of $29.8 million in fiscal 2022, Gomes expects HEXO’s Adjusted EBITDA figure to turn positive in 2023 at $31.8 million for an implied margin. by 10.4%. Gomes expects the margin to widen in 2024, with the projection of $69.4 million implying a margin of 17.7%.
Gomes also expects the company’s gross margin to decline from 29% in 2021 to 7% in 2022 and then rise to 32% in 2023.
HEXO’s stock price has fallen 91.1% in the past 12 months and is down 18.7% since the start of 2022. After hitting a 52-week high of $9.80/share the March 15, the stock had been on a downward trend since the beginning of June, finally falling to a 52-week low of $0.60/share on January 27.