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HEXO Received License Amendment, Stock Rose Monday

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Jun. 2 2020, Updated 11:05 a.m. ET

On Monday, HEXO (TSE:HEXO) announced that it received a license amendment from Health Canada for its manufacturing and processing facility in Belleville, Ontario. The license allows HEXO to sell dried and fresh cannabis, cannabis extracts, cannabis topicals, and edible cannabis products from the facility. The license also allows the Truss/HEXO beverage division to produce cannabis-infused beverages.

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Speaking on the license amendment, HEXO CEO Sebastien St-Louis said, “Receiving the sales license for our Belleville facility is extremely positive news for HEXO and Truss, our joint-venture with Molson Coors Canada. This license allows us to increase our processing capability significantly, achieve greater economies of scale, and continue to roll out more innovative 2.0 products across all of our brands Powered by HEXO, including hash, vapes, cannabis beverages, and other edible cannabis products.”

HEXO’s management stated that the Belleville facility houses custom-built automation and best-in-class cannabis technology to streamline its processes. So, management expects the facility to bring its production cost down and improve its gross margins. Also, the facility is located along Ontario’s primary shipping routes, which could boost the company’s national expansion strategy.

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HEXO’s stock rose

Investors liked HEXO’s announcement. On Monday, HEXO stock rose to a high of 0.75 Canadian dollars before closing at $0.69. The level represents a rise of 9.0% from the previous day’s closing price. Despite the surge, HEXO has lost 56.6% of its stock value this year. Weak second-quarter earnings, rising debt, and concerns about dilution due to new equity offerings dragged the stock down. HEXO has underperformed its peers and cannabis ETFs. Canopy Growth (TSE:WEED), Aurora (NYSE:ACB), and Aphria (NYSE:APHA) have fallen by 18.5%, 42.6%, and 11.5% YTD, respectively. The Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) has declined by 13.8% during the same period.

Analysts’ expectations and recommendations

For fiscal 2020, analysts expect HEXO to report revenues of 75.2 million Canadian dollars. The amount represents a rise of 58.2% from 47.5 million Canadian dollars in fiscal 2019. They expect the company to report a negative EBITDA in fiscal 2020. However, they expect the EBITDA to improve from a loss of 64.1 million Canadian dollars in fiscal 2019 to a loss of 49.7 million Canadian dollars this fiscal year. Analysts expect the company to become profitable in fiscal 2022.

Moving to analysts’ recommendations, they favor a “sell” rating for HEXO. Among the 13 analysts, 53.8% recommend a “sell,” 7.7% recommend a “buy,” and 38.5% recommend a “hold.” As of June 1, analysts’ consensus target price was 1.25 Canadian dollars, which represents an upside potential of 35% from its current stock price.

Meanwhile, Cantor Fitzgerald favors Aurora Cannabis and Aphria in the cannabis space. To learn more, read Aurora and Aphria Look Attractive for Cantor Fitzgerald.

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