Tilray is still a pass, says Haywood

Consolidation continues in the Canadian cannabis space, as Tilray Brands (Tilray Brands Stock Quote, Charts, News, Analysts, Financials TSX:TLRY) has finalized its acquisition of HEXO Corp. 

And while the move is a good one for Tilray, Haywood Capital Markets analyst Neal Gilmer is staying on the sidelines as far as investing in TLRY goes. Gilmer reiterated a “Hold” rating in a Tuesday report to clients, saying caution should be exercised with both Tilray and the Canadian pot space in general.

Leamington, Ontario-headquartered Tilray announced last week the closing of its acquisition of Gatineau, Quebec’s HEXO Corp, saying that the deal creates Canada’s largest cannabis company by revenue and gives the combined company a 13 per cent market share in the space, with the #1 position in the flower category, #2 in pre-rolls and #4 in vapes.

“Acquiring HEXO boosts Tilray’s competitive positioning in the largest, federally legalized cannabis market in the world and, we believe, marks the next evolution of Canadian cannabis,” said Tilray Chairman and CEO Irwin D. Simon in a press release.

Gilmer said along with making it the clear leader in the Canadian adult-use space the acquisition creates an opportunity to drive additional growth and realize further efficiencies. Tilray expects over $27 million in annualized cost savings through synergies across production, sales, marketing, distribution and corporate savings.

“While we expect the transaction to be a drag on margins and cash flow in the near term, once integrated, it should become accretive to both profitability and cash flow,” Gilmer wrote.

Gilmer noted that Tilray is expected to report its fourth quarter fiscal 2023 financials in July, with the analyst forecasting sequential topline growth and expanding margins, with management’s guidance for adjusted EBITDA to be in the range of $60-$66 million for the full fiscal year.

The analyst is calling for full fiscal 2023 revenue of $595.4 million and adjusted EBITDA of $60.9 million, while for 2024 the forecast is for $699.1 million in revenue and $82.4 million in EBITDA.

With his reiterated “Hold” rating, Gilmer moved his 12-month price target on TLRY from $3.00 to $2.00, citing dilution associated with the HEXO transaction and a decrease in multiple. At press time, the new $2.00 target represented a projected return of 27 per cent.

“We are encouraged by the international opportunities, as well as the expanding beverage segment in the U.S. However, we remain cautious on the overall Canadian landscape and the lack of growth the Company has been able to achieve. We maintain our Hold rating as we await more evidence on accelerated near-term revenue growth drivers,” Gilmer wrote.