The street is running out of excuses to not own Hydropothecary, Echelon says

The graduation of The Hydropothecary Corp (TSXV:THCX) from the TSX Venture Exchange to the TSX could be a catalyst to unlock value, Echelon Wealth Partners analyst Russell Stanley says.

On Friday, THCX will graduate to the TSX and ring the opening bell at the exchange. Management also announced it will seek shareholder approval to change its name to HEXO Corp.

“Graduating to a major exchange such as the TSX demonstrates Hydropothecary’s growth and proven ability to execute,” CEO Sebastien St-Louis said. “Since 2013, our company has demonstrated our continuous commitment to providing industry-leading, innovative products while never compromising the quality or consistency that we are known for. We are thrilled to represent this on the TSX.”

Stanley says this development may solve the problem of what he sees as a company flying under the radar.

“We view the TSX graduation positively, as TSX-listed cannabis companies currently trade at an average EV/C2019E EBITDA multiple of 29.4x, representing a 110% premium to the 14.0x at which TSXV-listed companies trade. With THCX currently trading at 11.9x our estimates for C2019E EBITDA, the graduation could act as a catalyst in closing the valuation gap. The Company’s fully-diluted market
capitalization now exceeds $1B+, and that peer group trades at approximately 30.7x, representing an 148% premium to the 12.4x at which sub-$1B market capitalization stocks trade. We also remind readers that the Company has a very level of revenue visibility, given its supply agreement with the SQC. As discussed in our last note, the Company recently announced it had received Health Canada approval for the first two zones of its Building 6 Expansion, which adds 250,000 SFT, and should take annualized capacity to 25,000 kg once at full capacity. The Company is also on track to complete its Building 9 Expansion by December, which would take annualized capacity to 108,000kg. On that basis, we believe the street is running out of excuses to trade this stock at a discount.”

In a research update to clients today, Stanley maintaiend his “Speculative Buy” rating and one-year price target of $6.75 on Hydropothecary, implying a return of 36 per cent at the time of publication.

Stanley thinks THCX will generate EBITDA of negative $12.0-million on revenue of $10.3-million in fiscal 2018. He thinks those numbers will improve to EBITDA of positive $15.1-million on a topline of $97.1-million the following year.