Hexo Analysts Project Continued Underperformance After Q2 Report

Consumer packaged goods company HEXO Corp. HEXO HEXO released its second-quarter financial results Monday, posting net revenue of CA$17 million ($12.01 million), a 17% quarter-over-quarter increase. 

The company reported a quarterly net loss of CA$298.2 million versus a loss of CA$4.3 million in the same quarter of 2019.

The HEXO Analysts

Cantor Fitzgerald's Pablo Zuanic maintained an Underweight rating on Hexo with a price target of CA$0.72 (51 cents).

BofA Securities’ Christopher Carey resumed an Underperform rating on the stock with a CA$1 price objective. 

Cantor Sees Important Issue In Hexo’s Lack Of Improvement In Cash Burn

The most important factors in Hexo's second-quarter report were: no improvement in cash burn, lower gross profit per gram and worsening operating cash flow/sales ratios, Zuanic said in a Monday note. 

Considering that the company’s operating cash flow worsened while its adjusted EBITDA figures improved, the analyst suggested that adjusted EBITDA shouldn’t be used to measure the company’s advancement.

Even though the company is minimizing its operational costs and projecting positive adjusted EBTIDA by the first half of fiscal 2021, Zuanic said he sees greater problems such as OCF and FCF, and projects break-even EBITDA in early fiscal 2022.

“The risk of further dilution, lack of meaningful and sustainable sales improvement (i.e., OCF worsened, so we do not see the sales increase as of good quality), low gross profit per gram (at these price levels % gross margins lose relevance), and ongoing cash burn, make us maintain the Underweight.”

Zuanic said he believes Hexo will continue to underperform.

BofA Doubts ‘Any Sustainable Support’ For Hexo

Hexo stated it must raise extra funds to support its working capital and other needs, and per its corrected covenants, it should raise CA$40 million in equity by April 30, Carey said in a Tuesday analyst note.

The analyst resumed coverage after moving the stock to Under Review, "as we could not rely on HEXO’s financial statements after mgmt announced a delay in filings." 

The company said it could raise up to CA$150 million to fund its strategic plans, the analyst said. 

It is hard to imagine any proper funding for HEXO considering this "backdrop," and any increase in shares could be interpreted as an opportunity for more equity raises, he said. 

“We are resuming coverage of YHEXO/HEXO with an Underperform rating (C-3-9) and price objectives of C$1.00/US$0.71. Our target is on 1x our CY21e sales, the low-end of the target range for our cannabis coverage, reflecting limited visibility on cash.”

HEXO Price Action

Hexo shares were trading 3.39% higher at 82 cents at the time of publication Tuesday. 

Photo courtesy of Hexo.