CIBC analyst John Zamparo downgrades HEXO to $5 from $6 Recent negative sentiment toward the North American cannabis industry is a “product of deferred U.S. legalization and lack of Canadian profitability,” according to CIBC World Markets analyst John Zamparo.
In a research note released Thursday, he reduced his targets for a series of stocks in his coverage universe, pointing to “elusive profitability ... modest sequential sales growth, and ongoing U.S. government gridlock, which reduces the probability of significant reform until at least 2022.”
“We believe the 25-per-cent decline as measured by sector ETFs over the past three months is the product of ongoing lack of profitability from most Canadian producers, the continued dearth of institutional investors, and the realization that U.S. legalization appears unlikely until at least next year,” he said. “We do note that the de-facto reintroduction of the SAFE Banking Act (via the National Defense Authorization Act) has a meaningful chance of passing in the U.S. Senate. This would be constructive for the space, and would represent the first meaningful legislative win for the sector. However, it would only impact sentiment. It would not permit Canadian firms to operate in the U.S. THC market, nor allow the up-listing of U.S. operators or alter onerous 280E taxation rules.”
He did, however, note valuations now appear reasonable across the sector, saying: “EV/sales valuations across our coverage are approximately two turns below median values over the past two years. We believe the achievement of profitability will begin to differentiate the sector in 2022, though among our coverage universe, we forecast only HEXO and TLRY to be profitable for the next calendar year.”
His changes include:
* Aurora Cannabis Inc.
“underperformer”) to $7 from $8. The average on the Street is $7.85.
* Canopy Growth Corp.
“neutral”) to $22 from $27. Average: $27.18.
“We have lowered our FQ2 sales and EBITDA forecasts for WEED following the CEO’s statement at a recent conference that year-over-year sales may decline in the quarter,” he said. “Since FQ2 last year, Canopy has gained $15-million-$20-million in quarterly revenue from acquisitions, implying that core revenue declined double digits year-over-year in a quarter in which stores operated unrestricted. We estimate that same-store sales were likely down 20 per cent year-over-year owing to the saturated Ontario retail environment, as well as a 3-4 percentage point decline in market share.”
* Cronos Group Inc.
, “neutral”) to US$7 from US$8.50. Average: US$6.43.
* Hexo Corp.
“outperformer” to $5 from $6. Average: $5.97.
* Organigram Holdings Inc.
, “neutral”) to $3.50 from $4. Average: $3.84.
* Riv Capital Inc.
, “outperformer”) to $2.25 from $2.50. Average: $2.25.
* Tilray Inc.
, “neutral”) to US$14 from US$17. Average: US$16.39.