Why HEXO Is Investor’s Favourite Currently?

HEXO Corp (NYSE: HEXO) produces and sells Cannabis in Canada. Hexo was incorporated in 2013 and became a public listed company in Canada in 2017. The company got uplisted to trade on the NYSE in January this year.  This gave the company a broader investor’s base and more coverage. The company is giving tough competition to the top three Canadian Cannabis stocks.

The company released its second quarter fiscal year 2019 results on March 14, 2019. Revenue came at C$13.4 million when compared to C$1.2 million for the same period last year. This was the first full quarter after Canada legalized the use of recreational marijuana. Net loss was C$4.3 million when compared to C$8.95 million for the same period last year.

Average selling price for recreational cannabis increased to C$5.83 compared to C$5.45 for the first quarter of fiscal year 2019. It sold 2,537 kilograms when compared to 952 kilograms. The average selling price of medical use cannabis was C$9.15 compared to C$9.12. Medical cannabis sales fell slightly this quarter to 152 kilograms from 158 kilograms.

The company is yet to become profitable and it expects to be profitable in the next few quarters. The management expects the revenue to cross C$400 million for the fiscal year 2020.

The company has cash and cash equivalents of C$165,571 and working capital of C$224,332. The company raised gross proceeds of C$57.5 million through the public offering and C$65 million through the syndicated credit facility with the Canadian Imperial Bank of Commerce (CIBC) and Bank of Montreal (BMO).

The company also entered an agreement to acquire Newstrike Brands Ltd which will give access to the company to the additional eight provinces. HEXO was initially more concentrated in Quebec. Hexo is expected to add more than 470,000 sq.ft in production space when completed. This is the first cannabis deal between any two Cannabis companies in Canada. It would also paved way for the company to be the fourth largest Cannabis company in Canada behind Canopy Growth (NYSE: CGC), Aurora Cannabis (NYSE:  ACB), and Tilray Inc (NASD: TLRY).

Beacon Securities analyst Russell Stanley is bullish on the company and mentions in this research note “HEXO now trades at approximately 14x EV/C2020E EBITDA, which represents a 61% discount to the 35x average amongst cannabis companies with a C$1B+ market capitalization, and a 77% discount to the 61x average that US-listed cannabis companies trade at,”.

The company has an agreement with SQDC and is the preferred supplier for cannabis products for the Quebec market for the first five years following legalization. The company will supply 20,000 kg of products in the first year, 35,000 in the second year, and 45,000 kg in the third year. Based on the current publicly disclosed agreements signed between the SQDC and seven other licensed producers, the company has obtained the highest first-year volume and it represents 30% market share in Quebec.

Conclusion: The Company’s revenue is growing at a quick pace and it’s making the right acquisitions. It has prudent management. HEXO has opportunities to grow globally. The stock is up 95% year-to-date and any market correction the company could attract long-term cannabis investors.

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