HEXO Corp.

HEXO Corp. (TSX: HEXO) is a consumer-packaged goods cannabis company that manufactures and distributes innovative products which cater to the global cannabis market. The Company cater to the Canadian adult-use markets under its HEXO Cannabis, Up Cannabis and Original Stash brands, and the medical market under HEXO medical cannabis.

Key Highlights:

• Recently the company announced the expansion of its product range to Canadian medical customers at CannMart.com from March 2021. The company intends to increase the availability of its products to a wider customer base through the home delivery segment. 
• On February 16, 2021, the company confirmed the acquisition of Zenabis Global Inc. at a price consideration of CAD 235 million. The above acquisition would enhance its footprints across Europe, which is a key positive.

Q1FY21 Financial highlights:

• HEXO announced its quarterly results, wherein the company posted net revenue of CAD 29.468 million, significantly higher than CAD 14.449 million in the previous corresponding period (pcp). The increase was driven by strong momentum within the Adult-use cannabis segment, partially offset by a lower medical cannabis segment.
• Gross profit before fair value adjustments stood at CAD 11.924 million, as compared to a loss of CAD 21.327 million in Q1FY20. The increase was driven by higher revenue coupled with a significantly lower cost of goods sold (CAD 17.544 million versus CAD 35.826 million in pcp).
• Loss from operations declined to CAD 2.562 million from a loss of CAD 60.463 million in Q1FY20. The improvement was primarily driven by lower selling, general and administrative costs (CAD 11.916 million versus CAD 15.973 million in pcp), a decline in Marketing and promotion expenses (CAD 2.082 million versus CAD 6.220 million in pcp) and lower research and development costs (CAD 1.033 million versus CAD 1.744 million in pcp).
• Net loss and comprehensive loss stood lower at CAD 4.197 million, as compared to a loss of CAD 60.016 million in pcp.
• The company reported cash and cash equivalents of CAD 149.773 million, while total assets were recorded at CAD 693.773 million.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: The company’s products are relatively new and a change in the consumer preference would likely dampen the overall demand of the company’s offerings.

Valuation Methodology (Illustrative): EV to Sales based valuation.

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

With the acquisition of Zenabis, the group would become the top three licensed producers in terms of combined Canadian recreational cannabis sales. Moreover, the proposed Transaction would give HEXO access to the licensed capacity of producing ~111,200 kg of additional high-quality cannabis annually, which augurs well for addressing the increasing demand from the segment. The Adult-use cannabis segment witnessed strong traction in the recent past supported by growing demand across Canada, which is a key positive. The stock appreciated ~125% and ~143% in the last three months and nine months, respectively. We have valued the stock using EV to Sales based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered the industry (Pharmaceuticals) median on an NTM basis. Hence, considering the aforesaid facts, we give a ‘Watch’ rating on the stock at the closing market price of CAD 9.46 on February 23, 2021, and would suggest investors to wait for a better entry point.

HEXO Daily Technical Chart (as on February 23, 2021). Source: Refinitiv (Thomson Reuters)

Empower Clinics Inc.

Empower Clinics Inc. (CSE: CBDT) is an owner and operator of medical cannabis clinics and developers of medical products in the United States, focused on enabling individuals to improve and protect their health.

Key Highlights:

• Recently, the company confirmed that it’s KAI Medical Laboratory is capable of detecting new B.1.1.7 (UK variant) & B.1.351 (South African variant) of COVID-19 PCR test accurately. As per the scientists, this tend to spread faster and are more transmissible or more infectious in nature. Earlier, the group reported that it has exceeded 1,000 COVID-19 test units per day. The group seek to undergo larger expansion in anticipation of projected growth in COVID-19 test requirements in the U.S., Canada and international markets.
• On February 09, 2021, the company declared its partnership with Rexall Pharmacy Group and would launch the first of multiple integrated healthcare centers within Rexall pharmacies commencing in Ontario, Canada.

Q3FY20 Financial Highlights:

• CBDT announced its quarterly results, wherein the company posted total revenues of USD 0.64 million, lower than USD 0.66 million in the previous corresponding period (pcp).
• Earnings from clinic operations slide to USD 0.39 million, from USD 0.60 million in Q3FY19, primarily due to an increase in total direct clinic expenses (USD 0.24 million versus USD 0.055 million in Q3FY19).
• Loss from operations stood at USD 0.844 million, as compared to USD 0.843 million in pcp.
• Net loss and comprehensive loss stood USD 0.460 million, as compared to USD 0.504 million in Q3FY19.
• The group reported a cash balance of USD 0.112 million, while total assets were recorded at USD 1.446 million.                    

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company witnessed an increase in the accumulated deficit due continuous net losses on account of higher input costs. Continuation of the above trend would dampen the company’s prospects.

Stock Recommendation:

The group acquired KAI Medical Laboratory during October 2020, and the detection of the new variant of COVID 19 virus would lead to higher traction for tests, which is a key positive. Moreover, the Company intends to open a fully functioning hemp-based CBD extraction facility in greater Portland, Oregon, with the first extraction system expected to have the capacity to produce 6,000 kilograms of extracted product per year. The stock of CBDT soared ~2137% and ~4375% in the last three months and six months, respectively. On the valuation front, the stock is available at a Price to Sales (TTM) multiple of 178x, which is significantly higher compared to the industry average of 1.4x. We believe most of the positives has been priced in and the stock is due for a correction. Hence, considering the above facts, we recommend an ‘Avoid’ rating on the stock at the closing price of CAD 1.79 on February 23, 2021.

CBDT Daily Technical Chart: Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.