HEXO Corp still in a tight spot, says ATB Capital

ATB Capital Markets analyst Frederico Gomes still thinks HEXO Corp. (HEXO Corp Stock Quote, Chart, News TSX:HEXO) is dealing with a heap of trouble, maintaining a target price of $0.80/share while sticking with his “Underperform” rating in an update to clients on Wednesday.

Founded in 2013 as The Hydropothecary Corporation and headquartered in Gatineau, Quebec, HEXO Corp is a cannabis producer, marketer and retailer, offering its adult-use and medical products under the HEXO brand, cannabis beverages under the Little Victory, House of Terpenes, Mollo, Veryvell and XMG brands and cannabis products under UP Cannabis, Original Stash and Up brands.

Gomes’s latest analysis comes after HEXO provided an update on its strategic plan, one which calls for HEXO to reduce SG&A, divest non-core assets and leverage manufacturing efficiencies to generate incremental cash flow of $37.5 million in the 2022 fiscal year and another $135 million in its 2023 fiscal year.

“As part of the ongoing efforts to reduce SG&A, management plans to reduce reliance on outside consultants, streamline the organization as a new IT platform is implemented, right-size the organization and realize the synergistic benefits of recent acquisitions,” Gomes said.

As part of the plan, HEXO plans to reduce manufacturing and production costs by leveraging the capacities of its recent acquisitions, which includes transitioning from co-packaging agreements towards in-house production capabilities and reconfiguring HEXO’s production network to achieve greater efficiencies. For instance, the company plans to move its vape and distillate facility into the Redecan facility it owns, which company management believes will produce a cost savings of approximately $30 million.

“It is a strategic imperative for HEXO to strengthen its capital position and restructure the Company’s operations to ensure a path to achieving positive cash flow from operations within the next three quarters,” said Scott Cooper, President and CEO of HEXO in the company’s January 19 press release. “As an organization we are making strategic decisions quickly to ensure we have the optimal operating footprint we need for the next phase in HEXO’s strategic evolution while remaining focused on the needs of customers and in our continued efforts in product innovation.”

In addition, the company is also bringing in approximately $10.1 million in cash by selling its 25 per cent stake in its Belleville complex to Olegna Holdings, which now has full control of the facility, though HEXO will continue to lease the facility.

“While the Belleville Complex sale is a positive step, the proceeds from this transaction represent only three per cent of our estimated total indebtedness for HEXO,” Gomes said.

All told, HEXO Corp had $55.8 million in cash available at the end of its most recent financial quarter, along with $131.6 million in restricted funds, as well as $14 million it raised under its ATM. Those figures stand in contrast to the US$241.6 million ($311.7 million in Canadian dollars) in principal outstanding under its Senior Secured Convertible Note, while Gomes notes the company’s overall indebtedness to be around $402 million when accounting for other debt instruments like $40.1 million in unsecured convertible debentures, and $50.2 million in senior notes payable to Zenabis.

In his full December report, Gomes reduced some of his financial projections for the company, lowering his revenue projection for 2022 from $253.8 million to $235.7 million for a 90.4 per cent year-over-year increase, while lowering his 2023 projection from $321.3 million to $307.2 million for a 30.3 per cent year-over-year increase. His 2024 projection remains at $392.7 million, good for a year-over-year jump of 27.8 per cent.

Meanwhile, after projecting a $29.8 million loss in 2022, Gomes forecasted the company’s adjusted EBITDA to turn positive in 2023 at $31.8 million for a margin of 10.4 per cent, with a projected jump to $69.4 million and a 17.7 per cent margin in play for 2024.

In terms of adjusted gross profit, Gomes significantly lowered his 2022 estimate from $63.4 million to $17.1 million for a margin of 7.2 per cent, with the 2023 projection now set at $99.6 million instead of $103.8 million, though the margin projected a slight increase to 32.4 per cent.

“In our view, these actions are positive and are in line with the steps management needs to take to rationalize HEXO’s footprint,” Gomes said. “However, considering HEXO’s indebtedness and cost structure, we continue to view material financing, dilution and going concern risks impacting the Company until a comprehensive balance sheet restructuring occurs.”

HEXO Corp’s stock has plummeted by 91.9 per cent over the last 12 months, unable to sustain its high point of $13.05/share from February 10 as it has declined to a present 52-week low of $0.73/share. At press time, Gomes’ $0.80 target represented a projected one-year return of 9.6 per cent.