This morning, Canaccord Genuity lowered their 12-month price target on Hexo Corp (TSX: HEXO) (NYSE: HEXO) to C$1.00 from C$1.50 and reiterated its hold rating. Stifel and Cormark also cut their price targets on the company from C$0.90 to C$0.60 and C$1.25 to C$1.00, respectively.
These cuts come after HEXO released its fourth-quarter and full-year financials. Matt Bottomley, Canaccord’s analyst, says that the results, “were generally in line with our expectations on the top line; however, once again, due to prevailing market conditions and historical overextended capital deployment, HEXO booked sizable inventory and fixed asset write-offs in the period.” These impairments were almost 20% of their market cap.
Hexo reported total net revenue of C$27.1 million, while Canaccord’s estimate was C$26.5 million. Bottomley adds, “With its Belleville production facility receiving its production/sales license in the quarter, HEXO launched its vape and beverage product lines, which combined accounted for ~14% of the sequential growth in the quarter.” The company lost ~1000 bps on their adjusted gross margin, which came in at 30%. This is a result of initial overhead and scaling costs associated with their beverage launch.
Bottomley highlights the massive impairments Hexo did this quarter. The firm booked a C$43 million inventory write-down, which is ~60% higher than the companies total sales for the quarter. This is alongside a C$46 million impairment on fixed assets for the quarter. Bottomley comments, “We believe these charges continue to highlight the risks of what is still a rather challenged macro environment in the Canadian market, as well as what appears to be historical inefficient capital allocation into working capital and fixed assets.”
Onto the balance sheet, Bottomley says, “we believe the risk of continued near-term dilution is relatively low at this time,” as Hexo now has C$184 million of cash on hand. In comparison, the current annualized free-cash-flow burn rate is ~C$67 million.
Bottomley justifies the price target reduction by stating, “we believe the continued magnitude and frequency of inventory and fixed asset write-offs is concerning.” However management has said that they now believe the book values on its balance sheet are appropriately right-sized for the current environment.
Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.