Following the company’s fourth quarter results, PI Financial analyst Devin Schilling has cut his price target on HEXO (HEXO Stock Quote, Chart, News TSX:HEXO).
This morning, HEXO Corp reported its Q4 and fiscal 2019 results. In the fourth quarter, the company lost $60.65-million on net revenue of $15.4-million.
“We are at the end of the first year of adult use legalization in Canada, which was an incredible year full of successes and challenges across the industry. We’ve gone from $4.9M to $59.3M 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,” CEO Sebastien St-Louis said. “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”.
“”Above and beyond significantly increasing our retail reach to nine provinces, we’ve also launched Original Stash, the industry’s first true value brand, which we believe will not only compete directly with the illicit market but also contribute to a significant increase in sell-through,” St-Louis added.
“Our target represents an EV/EBITDA multiple of 16x based on our FY21 EBITDA (previously 12x) which is a blended average of the large and midcap LP’s valuation multiples…”
Schilling summarized how the quarter played out against his expectations.
“Net revenue was $15.4M, up from $1.4M last year, EBITDA was ($29.6M) versus ($9.5M) last year and EPS was ($0.23) versus ($0.06) last year,” the analyst noted. “HEXO’s revenue beat our revised (lower) estimate of $14.9M while EBITDA and EPS were a large miss on both our and consensus estimates due to operating expenses growing at a much faster rate than revenue growth (95% vs 18% qoq).
HEXO recorded $15.4M in net sales during Q4, up from $13.0M in Q3. The increase was guided in mid-October when HEXO announced that it was expecting net revenue for Q4 to be ~$14.5M-$16.5M.”
Schilling says the elephant in the room was the steep rise in HEXO’s operating expenses.
“Operating expenses increased 95% qoq to $46.9M which significantly outpaced the 18% qoq revenue growth and highlights the need for cost cutting initiatives. Subsequent to the quarter, HEXO reduced its cost structure by eliminating ~200 jobs and also suspended cultivation at is Niagara facility and in 200,000 sq. ft. of its Gatineau facility. The impact of this initiative will not likely show up until HEXO’s Q2.
In a research update to clients today, Schilling lowered his rating on HEXO from “Buy” to “Neutral” and cut his price target from $5.00 to $3.00, implying a return of negative 1.3 per cent at the time of publication.
Schilling thinks HEXO will lose $58.4-million on revenue of $108.2-million in fiscal 2020. He expects those numbers will improve to a profit of $17.7-million on a topline of $244.4-millio the following year.
“Our target represents an EV/EBITDA multiple of 16x based on our FY21 EBITDA (previously 12x) which is a blended average of the large and midcap LP’s valuation multiples,” the analyst explained.