HEXO Corp vs. Organigram: Is There a Clear Winner?

We provide some insights into the investment cases for both Organigram Holdings Inc. (TSX: OGI) and HEXO Corp. (TSX: HEXO)

SmallCapPower | August 26, 2019: Today we are going to compare two strong intermediate players within the Canadian cannabis industry: HEXO Corp. (TSX: HEXO) and Organigram Holdings Inc. (TSX: OGI). Both companies have similar market caps and capabilities.

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HEXO Corp

HEXO is a consumer-packaged goods cannabis company that designs and distributes innovative products to the global cannabis market. The Company utilizes a hub-and-spoke business strategy that involves partnerships with Fortune 500 companies. Through this strategy, HEXO brings its brand value, cannabinoid isolation technology, licensed infrastructure and regulatory capability to established companies, leveraging their distribution networks and capacity. HEXO is one of the largest licensed cannabis companies in Canada with a total of 2.4M sq. ft of facilities in Ontario and Quebec. The Company is expanding internationally and has a foothold in Greece to develop a Eurozone processing, production and distribution center.

Figure 1: Breakdown of HEXO’s Hub and Spoke Business Model

Source: Company Reports

Investment Highlights

Foothold in Quebec – HEXO has agreements to supply nine provincial governments, which includes a five-year contract with Quebec’s Société Québécoise du Cannabis (“SQDC”), which the Company expects to be worth $1 Billion in potential revenue. The agreement with SQDC represents about 30% or more of the province’s recreational use sales in the first year of legalization based upon disclosed supply agreements. According to HEXO, the Company’s current agreements allow it to have the potential to reach 95% of the Canadian population (MD&A, 2019).

Figure 2: HEXO’s Anticipated Distribution by Province

Source: MD&A

The Company has strong expansion plans to capitalize on the global cannabis market, estimated to be worth US$130B by 2029 (Jefferies, 2019). Specifically, HEXO is considering entering eight states in the U.S. in 2020 and expects to utilize a variety of distribution channels in order to provide a diverse offering of products. Jefferies’ estimation for the size of the U.S. cannabis market is US$21.7B, 26.7% higher than its estimation for Canada. In addition to its current foothold in Greece, the Company is planning to leverage its operations there to enter the UK by 2021 and the France soon after.

HEXO Corp currently has a Joint Venture (JV) with Molson Coors Canada that has resulted in the formation of Truss. Truss focuses on developing non-alcoholic, cannabis-infused beverages. The JV announced on August 1, 2018, is structured as a standalone start-up company, with Molson Coors processing 57.5% controlling interest and HEXO having the remaining ownership interest. Molson Coors’ beverage experience combined with HEXO’s capabilities in the cannabis sector should provide a strong advantage in creating cannabis beverages for Cannabis 2.0, which is the legalization of cannabis edibles and other derivative products in Canada expected sometime in late 2019 or early 2020.

Organigram

Organigram is a licensed producer of cannabis and cannabis-derived products in Canada for recreational and medical markets. The Company’s diverse brand portfolio includes The Edison Cannabis Company, Ankr Organics, Trailer Park Buds and Trailblazer. The Company is completing Phase 4 of its expansion of its Moncton Campus that currently has an annual licensed production capacity of 61,000kg. OGI is also going to repurpose 56,000 sq.ft within its existing Moncton Campus for an edibles and derivative production facility and additional extraction capacity under EU GMP standards. The primary construction of the edibles facility is expected to be completed October 2019 at an estimated CAPEX of $48M. The Company is one of four Canadian licensed producers to have distribution agreements in all 10 provinces. Additionally, Organigram has international partners, which include Alpha-cannabis based in Germany and Eviana Health Corp based in Serbia.

Investment Highlights

Organigram has invested in biosynthesis, a disruptive technology that may potentially produce a scalable supply of cannabinoids at a lower price when compared to traditional cultivation costs. On September 13, 2019, the Company invested in Hyasynth Biologicals Inc., a biotechnology company based in Montreal, for $10M. Hysaynth has developed a biosynthesis technology that naturally produces cannabinoids without needing to grow cannabis plants. Through this process, Hysasynth has already made patent-pending enzymes that prohibit the production of CBG, CBD and THC.

The Company has proprietary nano-emulsification technology that has been developed based on analytical testing to create products that have an initial onset of 10-15 minutes. The technology creates shelf-stable, thermally-stable, water-soluble and palatable cannabinoid nano-emulsion formulation that prohibits the production of both liquid and powdered-beverage products. Currently, the Company is planning on launching dried powdered formulation beverage products in Canada early in 2020.

Organigram is advantageously positioned to benefit from Cannabis 2.0 legalization. The Company has made a $15M investment commitment for a high speed and capacity, fully-automated production line that is expected to have a capacity of up to 4M kg of chocolate cannabis edibles annually. OGI has partnered with Canada’s Smartest Kitchen to help develop premium chocolate products and grow its edibles research and development. Organigram is planning to start selling chocolate edibles in the beginning of the 2020. Additionally, the Company has been chosen as one of four Canadian partners of PAX Era, a premium oil vaporizer, designed by PAX Labs. OGI was also chosen as the exclusive supplier of Feather Company’s design-patented vaporizer and hardware technology. The current launch date for a variety of vaporizer pens by Organigram is December 2019.

Figure 3: Organigram’s PAX Era and Feather Products

Source: Investor Presentation

Comparison of Facilities

Source: Organigram’s MD&A

Source: HEXO’s MD&A

Comparison of Financial Performance

Source: Capital IQ

Financial Overview

On June 12, 2019, HEXO reported its Q3/19 financial results, highlighted by revenue of $15.9M, a QoQ decrease of 1.5%. As well, HEXO increased its cannabis produced by 98% to 9,804 kg of dried cannabis when compared to the previous quarter. HEXO reported holding cash and cash equivalents and short-term investments of $17.6M and capital of $219.1M.

On July 15, 2019, Organigram released its Q3/19 financial results that highlighted quarterly revenue of $24.8M, which is a QoQ decrease of 7.8%. OGI reported Adjusted EBITDA of $7.7M, which represents its fourth consecutive quarter of having a positive Adjusted EBITDA. During the quarter, OGI reported having $87.8M in cash and short-term investments.

In terms of trading multiples, Organigram stock trades at a 9.6x 2021E EV/EBITDA multiple while HEXO Corp shares trade at a 9.0x 2021E EV/EBITDA. Both companies trade at a discount when compared to peers that trade at an average 15.0x.

Conclusion: Both companies appear to have great long-term prospects. If there is an edge, however, we would give it to HEXO Corp, as the Company’s cannabis beverage joint venture with Molson Coors has global potential and HEXO is the market share leader in Quebec, Canada’s second-most populous province.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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