Newstrike Brands Ltd NWKRF

RE:RE:A fair deal

[DaBigRedCandle]

Im sure there's more upside for HIP and HEXO to combine forces. I do belive that HEXO is under value compared the WEED, ACB and the other who are trading at insane valuation. But I think that HIP shareholder deserved a premium on the deal and here's why:

Target price for HEXO after the deal = 18$
 
The target price is calculated whit the EV/2020EBITDA ratio of 23x.

EV = MKT cap + DEBT - CASH

Mkt cap = 18$ (target price) * SO (210.44 M + 0.06332*557.25 M) = 4.4 G$

Cash = 165M + 55M = 220M$ as disclosed with the detail of the deal. (not important tho)

EV = 4.6M$

EBITDA = EV/23x  = 4.6G$/23 = 200 M$

So to justified the 18$ target price, we need to have an EBITDA margin of 50% in 2020 since the combine revenu are projected to be 400 M$. 200 M$ EBITDA / 400 M$ revenu = 50% EBITDA margin.

Now before the deal, the analyst concensus was revenu of 233M$ for Hexo stand alone. That meen that they expect Newstrike revenu to add 167M in 2020. That would represent at 5$ a gramm around 33 000 kg witch is what is expected out of newstrike. 

If we use the same EBITDA margin of 50% for newstrike and the 23x EV/EBITDA ratio we can see that stand alone, the target price for newstrike would be ((167 M$ * 50% -107M$) * 23) / 557.25M = 3.29$ or 51.91$ for HEXO using the 0.06632 conversion ratio.

Now, the choice of 23x EV/EBTDA is a bit optimistic for newstrike so I took a pessimitic approach. I use 13x instead.

With the ratio of 13X the target price for newstrike become (167 M$ * 50% - 107M$) * 13 / 557.25M = 1.85$ or 29.21$ using the conversion ratio of 0.06332. So, even the pesimistic approach show that the deal is not fair for newstrike sharholder.

Lets see what apen to the target price with the conversion ratio that I proposed.

Whit the conversion ratio of 0.0995, The target price of 1.85$ for newstrike would represent a target price of 18.59$ for HEXO. MUTCH MORE FAIR for the newstrike sharholder.

That would mean spending 410 M$ today to generate minimum 167 M$ each year for HEXO. IT IS STILL CHEEP. But at least its fair.