Molson Coors partnership is a huge positive for Hydropothecary, GMP says

An exclusive deal with the world’s seventh largest brewer is a breakthrough for The Hydropothecary Corp. (TSX:HEXO), says GMP Securities analyst Robert Fagan.

On Wednesday, HEXO 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.

“Canada is breaking new ground in the cannabis sector and, as one of the country’s leading beverage companies, Molson Coors Canada has a unique opportunity to participate in this exciting and rapidly expanding consumer segment,” Molson CEO Frederic Landtmeters said. “This new venture is consistent with our growth strategy and our commitment to being first choice for consumers and customers by ensuring that Canadians have access to high-quality products that meet their evolving drinking preferences. While we remain a beer business at our core, we are excited to create a separate new venture with a trusted partner that will be a market leader in offering Canadian consumers new experiences with quality, reliable and consistent non-alcoholic, cannabis-infused beverages. We look forward to partnering with HEXO, a recognized leader in the medical cannabis space in Canada that will bring robust production capacity, a track record of innovation, and, most importantly, shared values when it comes to doing business the right way and earning the trust of consumers.”

Fagan says for HEXO, this is a win against practically all competitors in the space.

“As only the second LP in Canada to partner with a global alcohol company, the JV with Molson provides a significant endorsement of HEXO’s execution capabilities in our view. We believe Molson had an abundance of choices for potential partners, and went through a long diligence process. Given HEXO’s track record of product innovation was one of the factors influencing Molson’ decision, we believe this provides tangible validation of HEXO’s strong innovation capabilities,” the analyst says. “Historically, the cannabis-infused drinks category has been relatively small (<5% market share) in mature recreational US markets. In our view, this could be partly explained by a lack of sufficient capital being devoted to the category to improve formulations, and build brand recognition. However, with the strength of the global brands of Molson and Constellation, combined with their vast marketing resources, we could see a larger cannabis beverage category emerge in Canada.”

In a research update to clients today, Fagan maintained his “Buy” rating and one-year price target of $8.50 on HEXO, implying a return of 76 per cent at the time of publication.

The analyst thinks this deal puts Hydropothecary in rare company.

“In our view, the Molson partnership has clearly elevated HEXO’s status to amongst the industry leaders, and thus should be a strong catalyst for the valuation re-rating we’ve been expecting for HEXO for some time. Shares are currently trading at ~6x 2020 EV/EBITDA, a 40% discount to peers, when HEXO should be arguably trading at a premium in light of recent company developments. A valuation multiple in line with peers would suggest a stock price of ~$7.00 for HEXO.”