HEXO Corp could be an acquisition target, Beacon Securities says

Analyst Russell Stanley of Beacon Securities has a number of reasons to be bullish about HEXO Corp (HEXO Stock Quote, Chart TSX:HEXO), including its just released quarterly results, an imminent listing in the US slated for later this month and, compared to other Canadian cannabis stocks, a discounted valuation.

Gatineau, Quebec’s HEXO reported its Q1 2019 financials for the period ended October 31, coming in with a top line that beat expectations at $6.7 million compared to the consensus $5.7 million. Its EBITDA was negative $10.5 million, however, more than the expected $5.7 million. Stanley attributes the greater loss to higher-than-expected marketing and promotion, and as the early-stage results featured only two weeks of legal rec sales in Canada, Stanley is overall taking them as a positive, saying that the company’s sales execution should eventually outstrip opex growth.

“We continue to view HEXO as one of a select few cannabis companies with large-scale low-cost production, demonstrated strength in developing value-added products and an attractive valuation,” says Stanley in a research update on Friday.

The analyst noted that in yesterday’s conference call, HEXO management predicted that it would obtain a NYSE listing by the end of the calendar year, something which Stanley thinks will lead to multiple expansion. Again on the US front, Stanley says that the recently-passed 2018 US Farm Bill, which has paved the way for legalized hemp and hemp products, should also benefit HEXO through its Truss joint venture with Molson Coors.

Calling HEXO “a very attractive candidate for a strategic investor or acquirer,” Stanley sees HEXO to be trading at 8x his 2020 EBITDA estimates, which puts it at a 45 per cent discount to the 15x of the broader peer group and at a 76 per cent discount to the 34x at which the $1 billion-plus cannabis club trades (HEXO is just under the wire with a $979 million market cap).

The analyst has slightly lowered his EBITDA forecast for HEXO while maintaining his “Buy” rating and $11.00 target price, which represents a projected return of 120 per cent at the time of publication.