HEXO Corp: Is it Really a Top Cannabis Takeover Target?

In this market news, HEXO Corp.’s (TSX:HEXO) second-largest shareholder contends that its valuation is depressed despite being one of the best performers of all Canadian marijuana stocks

SmallCapPower | September 10, 2018: HEXO Corp. (TSX:HEXO), formerly Hydropothecary Corp., shares surged more than 20% on Thursday following the release of a letter by Riposte Capital, LLC., the second-largest shareholder and an investment manager with ~US$200 million in assets based in New York. The letter, dated September 5, 2018 and sent by Riposte Capital’s Managing Partner to HEXO’s CEO and Board of Directors, expressed concern on the current depressed valuation of HEXO, one of the Canadian cannabis stocks, and urged the management team to review strategic alternatives including sale and taking the company private.

For Our Complete Coverage Of Canadian Marijuana Stocks Click Here    

Watch: Cannex Capital Holdings (CSE:CNNX) Wants to Emerge as a Multi-State U.S. Player, Says CEO 

Riposte says that despite HEXO having the highest revenue visibility in the sector at $1.0 billion over five years due to the SAQ contract, it trades (as of September 4th) at an enterprise value/EBITDA of 8.1x, compared to the peer average of 30.0x and Canopy Growth’s 89x, which Riposte views as a direct competitor with similar revenue visibility and growth prospects. Assuming the peer average EV/EBITDA multiple, Riposte calculates intrinsic value for HEXO at $18 per share, which translates into $3.5 billion in market cap based on 198.3 million shares. Additionally, Riposte ascribes $500 million to Molson Coors JV, noting that it is modest compared to $12 billion in market cap ascribed to Canopy’s Constellation deal. Other positives noted by Riposte include Hexo’s strong balance sheet (22.4% of market cap in cash) and its lowest production costs owing to low energy prices in Quebec.

Win Big With Our Small Cap Picks

 

To maximize shareholder value, Riposte urged HEXO to review strategic alternatives at its next board meeting. These include engaging with interested investors who can buy shares at a significant premium; taking the company private; direct investment from Molson Coors to fund growth; and an accretive merger with a comparably-sized LP that can unlock value.

Growing acceptance of cannabis use in Canada and the impending recreational legalization continues to fuel hectic M&A activity in the industry. A recent report by PricewaterhouseCoopers highlights 48 deals totaling C$5.2 billion were closed in the first half of 2018, which included the C$1.2 billion Aurora-CanniMed deal in January. As majority of deals are paid in stock, an undervalued stock limits a company’s ability to grow through acquisitions. Hence a higher valuation of HEXO not only benefits the investors but also drives its growth through M&A.

Formerly known as Hydropothecary Corp, the Company changed its name to HEXO Corp. on August 29, 2018 and follows the previously announced launch of “HEXO” as its new brand for the adult-use cannabis market in May 2018. HEXO currently trades at a market cap of $1.4 billion on the TSX.

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

To read our full disclosure, please click on the button below: