RE:RE:RE:High Trail - Will Not De-Rail HEXO Corp (IMHO) Hey Random!
Always great to read your posts.
Thank you!
I agree with most of the content on your post, however I haven't read anything about point 4, can you let us know where you see that in the note?
Hexo acknowledges that they are in default in their financial statements. Hexo and Sundial are currently engaged in litigation about the amount to pay for prepayment. That is the reason for the USD60m of restricted cash required by the Secured Note. The names are redacted, but then you can trace it direct to . The judge would immediately lift any stay on proceedings to the extent Hexo no longer had the capacity to repay Sundial. Hexo has publicly acknowledged the default, and therefore acceleration would be immediate if not for the dispute over the prepayment amount. As a result, the elimination of the restricted cash would mean Sundial could take the assets (a simplification, but does not cut out anything of commercial relevance for this discussion).
Back in December, there was discussion around how many shares Hexo will have at the end of this convertible note. I thought it would be around 700M shares.
I'm guessing there is a chance it goes up to 800M, it will all depends on how much will come from traditional bank loan (I'm expecting between 50-100M) and how well the sector is going to perform in the next few months.
Not sure who would fund that level of credit at the moment given the state of Hexo, but not impossible.
That being said, the next real important question is how much Hexo will be worth?
1. Number 1 in rec sales
2. Trying to be the first one cash flow positive
3. who's got Molson as partner and another F200 (tbd)
4. Almost debtless (once we reach the 700-800M shares).
1. Market share being consistently eroded by new entrants. Pricing constantly falling. Product quality declining. Could not have the sales of Zenabis shortly.
2. Everyone is trying. Yoda has a comment on this. Yoda was right.
3. Could be valuable, but Truss is a JV.
4. Agreed on this point.
My guess based on Tilray and CGC being at 4B, is that Hexo will be worth at least 1B.
This is the mistake Sebastien made when he did the Redecan deal. He assumed that this was a rational market and that as a result comparables mattered. The relevant question is not the value based on comparables, because comps mean close to nothing in flow-based businesses. The relevant question is fundamental value, because there is no guarantee for anything to trade in line with comps. Hexo never traded in line with comps before they did the Redecan deal.
Divided by 800M shares, here is MC and SP.
500M / 0.625
1B / 1.25
2B / 2.50
4B / 5.00
Great returns from where we are.
I'm still waiting on Hexo confirming a daily uptrend before going heavy, but I think that will be a great trade. I'm mostly waiting because of how SP500 is hurting nowadays.
Three primary issues with your thesis (although not saying it may not be correct, but these are significant risks):
1. Market reaction to catalyst of a default. Could drive down share price and significantly increase level of dilution.
2. Market reaction to catalyst of losing Zenabis assets. Same issue.
3. Trading in line with comparables. Instead, comparables could come down. If there is limited profit to be earned within the sector, then at some point the market will lose patience regardless of size.