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GMP cuts target price on HEXO

HEXO

HEXO GMP Weak quarterly results have added more uncertainty to the outlook for Canadian licensed cannabis producer HEXO (HEXO Stock Quote, Chart, News TSX:HEXO), according to GMP Securities analyst Robert Fagan, who reviewed HEXO’s fourth quarter financials in an update to clients on Wednesday.

The analyst maintained his “Hold” recommendation while dropping his target price from $4.00 to $3.00, now representing a projected 12-month return of 2.0 per cent at press time.

Gatineau, Quebec’s HEXO Corp reported a net loss of $56.7 million for its fourth quarter ended July 31, which compared to a loss of $10.5 million a year earlier, while net revenue increased from $1.4 million to $15.4 million. That top line was in line with the company’s reduced guidance pre-released on October 10, which called for revenues 50 per cent off its former predictions. That October 10 release caused the stock to drop from roughly $5 to $4 per share, with HEXO’s share price trailing off further in the ensuing weeks.

HEXO CEO Sebastien St-Louis called the past 12 months an incredible first year for the Canadian rec cannabis industry, one which was full of successes and challenges.

“We’ve gone from $4.9 million to $59.3 million in gross revenue in just one year. This type of revenue growth is a testament to the Company’s resilience and capacity to pivot in the face of uncertainty,” said St-Louis, in a press release.

“I am confident that our multi-brand approach, focusing on customer demand, re-evaluating our strain mix, as well as the introduction of new products to counter the black market, will help us increase our market share and total revenue,” he said.

In his comments, Fagan noted that the Q4 also featured an EBITDA loss (excluding transaction costs) for HEXO of $26 million, which was the lowest in the company’s history and far lower than his forecast of negative $14 million and the consensus estimate of negative $13 million. The analyst attributes the greater loss to a spike in SG&A which more than doubled from the previous quarter to $31 million. HEXO’s $15.4 million in revenue was in line with Fagan’s estimate of $15.5 million.

Fagan’s report contains a number of question marks concerning HEXO’s future, starting with its supply agreement with SQDC, on which the analyst surmises that HEXO has opted to not fulfill its complete 20 tonnes volume commitment, a result which puts into question the company’s ability to meet its commitment for the upcoming two years (35 tonnes and 45 tonnes, respectively).

On the issue of HEXO’s derivatives products, Fagan thinks that the company’s Cannabis 2.0 offerings could be delayed by six months due to ongoing construction at its Belleville facility.

On the issue of cannabis production, along with its already announced 20-per-cent reduction in workforce, the company says that it will idle about 400,000 sq ft of production space to right-size its operations, including Newstrike’s 240,000 sq ft Niagara facility. Fagan calls this concerning, saying,

“It could suggest HEXO’s sales strategy reformulation could carry a greater impact than originally thought. Idling facilities could also reduce fixed-cost absorption, making HEXO’s target for positive EBITDA in CY20 more difficult to reach,” Fagan writes.

Finally, Fagan thinks that HEXO could become cash constrained, as the company exited Q4 with proforma cash of about $210 million, which could increase to about $240 million under its available credit facilities, yet management has indicated a need for about $100 million in capex over fiscal 2020, on top of which is an expected, say Fagan, 2020 EBITDA loss of about $50 million.

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About The Author /

Nick Waddell
Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.

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