HEXO Acquisition Of Newstrike Brands Could Be Undervalued

HEXO Corp (NYSEAMERICAN:HEXO) has indicated that the acquisition of the Newstrike Brands (OTCMKTS:NWKRF) would see the resulting company obtain over $400 million in net profit by 2020. Considering the figure the business combination could result in the company having forward sales trading at 3.8x.

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Cannabis industry competitors have forward sales trading of 69x, and therefore this could mean that the market undervalues HEXO based on analysts who have assessed the acquisition.

HEXO increasing its capacity

HEXO Corp has its headquarters in Gatineau Canada, and it produces and sells most of its cannabis products in the country. Apart from the main cannabis products such as cannabis oil sublingual mist and well-milled cannabis products, the company also produces and markets dried cannabis.

HEXO expects to increase its capacity of approximately 108,000 kg from the total footprint of 1.947 million square feet. The company has traded on the NYSE for almost three months which makes it a little known which is affecting its market liquidity.

The Brantford, Ontario-based Newstrike Brands were granted a cultivation license on 16 December 2016, and the company expects its harvest to be about 42,000 kg of cannabis. Although the company has not been around for long compared to HEXO, it has high capacity for cannabis production.

Acquisition to enhance market penetration

The addition of Newstrike Brands should not be considered a game changer, but it nonetheless will supplement the capacity of HEXO so that it can be able to compete with leading companies in the cannabis industry.

Newstrike Brands has a consumer product line synonymous to those of HEXO produces in the cannabis industry. Such products include infused foods, dried cannabis, steam hardware, and a skin care product line. The company intends to offer CBD infused beverages in the coming days.

Following the acquisition, HEXO Corp saw its market appreciated, and the day they announced the agreement its stock gained 5.56%. The new addition means that the company will be producing over 150,000 Kg of cannabis annually. The transaction will also help HEXO in diversifying its domestic market penetration in eight provinces in Canada.

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