Following its deal with Molson Coors, Beacon Securities analysts Doug Cooper and David Kideckel have raised their target price on The Hydropothecary Corp (TSX:HEXO).
Last week, Hydropothecary and Molson Coors announced a joint venture in the form of a stand-alone, startup company that will develop non-alcoholic, cannabis-infused beverages for the Canadian market following legalization.
“HEXO continues to lead the way for smoke-free cannabis innovation in Canada,” CEO Sebastien St-Louis said. “We are excited about this partnership with Molson Coors Canada, an iconic leader in adult beverages, as we embark on the journey of building a brand new market. With this new company, we are bringing together Quebec’s oldest, most established company with one of its newest success stories in a truly innovative partnership. “As two leading companies who share a track record of excellent practices, as well as respect for law and regulations, HEXO and Molson Coors Canada have established a relationship built on trust, and together we will develop responsible, high-quality cannabis-infused beverages for the consumable cannabis market in Canada.”
The analysts say this development turns HEXO into a “Canadian cannabis powerhouse”, comparing the deal to the one between Canopy Growth and Constellation brands last year.
“We view this as a historic milestone as the Canadian Cannabis industry looks for innovative ways to enter the beverage industry Cooper and Kideckel say. “This JV positions HEXO very well in its ongoing efforts to establish itself as a market leader in the Canadian cannabis industry. The last major deal of this nature was on October 30, 2017, when alcohol giant Constellation Brands (put $245m capital into Canopy Growth for a 9.9% stake. This was and still is a trend-setting endorsement by a world leading beverage producer into the world’s largest marijuana company, Canopy. For comparison, Canopy’s stock on October 30, 2017, prior to the announcement of the Constellation investment was $14.11 and closed the same day at $15.22. A modest delta, but considering where Canopy’s stock is now and how the Constellation/Canopy deal is used as a benchmark in the cannabis industry, we expect yesterday’s HEXO/Molson Coors Canada JV to be nothing short of trend-setting for the Cannabis industry as a whole.”
In a research update to clients August 2, the Beacon Securities analysts maintained their “Buy” rating but raised their one-year price target on HEXO from $9.50 to $12.50, implying a return of 159 per cent at the time of publication.
The analyst think Hydropothecary will generate EBITDA of negative $13.2-million on revenue of $5.0-million in fiscal 2018. They expect those numbers will improve to EBITDA of positive $38.2-million on a topline of $133.4-million the following year.