Tilray: Canaccord Lowers Target On Expected Adult-Use Sales Slump, Revised Hexo Deal

Earlier this week, Tilray Brands (TSX: TLRY) announced an update to their strategic alliance with Hexo Corp (TSX: HEXO) as well as amendments to HEXO’s debt. First off, Tilray announced that they have cut the conversion price on HEXO’s debt by more than 50%, dropping the price down to C$0.40 from C$0.85.

Additionally, Tilray expects that there are a number of reasons to pursue this strategic alliance between the two companies. First, they believe that there will be up to $80 million in shared cost-saving synergies and note that both companies have already “begun working on evaluating operations and production efficiencies with respect to cultivation and processing services.” HEXO will also be paying Tilray $18 million a year for advisory services.

Tilray also notes that this alliance will strengthen their product innovation, both in Canada as well as the international markets. For these two reasons, Tilray believes that purchasing this note will be “will be immediately accretive to the Company.”

Tilray Brands currently has 20 analysts covering the stock with an average 12-month price target of US$7.32, or an upside of 132%. Out of the 20 analysts, 2 have strong buy ratings, 2 have buy ratings, 13 analysts have hold ratings and the last 3 have sell ratings. The street high price target sits at US$23, which represents an upside of 630%.

In a note by Canaccord on the news, they reiterate their buy rating but lower their 12-month price target to US$7 from US$9, saying that the amended terms look good for HEXO. Though they note that the discount rate has been bumped up from 5% to 11%.

Canaccord says that Tilray will be a third-party production and processing manufacturer for HEXO, and that HEXO will source, “cannabis products for international markets exclusively from Tilray Brands.”

Canaccord has lowered their near-term estimates on Tilray as they believe that headwinds in the adult-use market “appear to be worsening on saturated market competition.” They estimate that Tilray’s adult-use brands have seen a decline of 14% quarter over quarter. As a result, they have lowered their estimates slightly, and believe that Tilray will report flat fiscal fourth-quarter results.

Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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