Stocks’ Details

Grocery Outlet Holding Corp.

A Look at 3QFY20 Key Financial Highlights: Grocery Outlet Holding Corp. (NASDAQ: GO) is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products that are sold via a network of separately owned and operated stores. During the September 2020 quarter, the company reported adjusted earnings of 50 cents as compared to 22 cents reported in the year-ago period. This marked the sixth consecutive quarter of positive earnings. In 3QFY20, the company reported net sales of $764.1 million, up 17.1% year over year, owing to comparable-store sales growth and contribution from 35 net additional stores. Gross profit came in at $238.2 million, up 18.4% year over year. Adjusted EBITDA stood at $55.3 million, which soared 25.1%, owing to gross margin expansion. The company exited the quarter with a cash balance of $59.1 million and total debt of $460.1 million.

Key Highlights (Source: Company Reports)

What to Expect: The company predicts gross margin and adjusted EBITDA margins for the coming quarter to be at or marginally below previous-year levels, owing to COVID-19 related distribution expenses and higher commodity cost. GO plans to open seven stores in 4QFY20, thus resulting in 34 new outlets in FY20. For FY20, capex is expected to be ~$105 million.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of GO closed at $37.78 with a market capitalization of ~$3.56 billion. The stock is currently trading below the average of its 52-week trading range. The stock went up ~14.3% in the last six-month period. On a technical analysis front, the stock has a support level of ~$34.5 and a resistance level of ~$38.2. Considering the above factors, we have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like we have taken the peer group Costco Wholesale Corp (NASDAQ: COST), Target Corp (NYSE: TGT), Walmart Inc (NASDAQ: WMT), to name few. Hence, considering the current trading level, decent outlook, robust 3QFY20 results, and higher contribution from 35 net additional stores, we recommend a “Buy” rating on the stock at the closing price of $37.78, up by 0.75% on 7 December 2020.

Switchback Energy Acquisition Corporation

SBE to Combine with ChargePoint: Switchback Energy Acquisition Corporation (NYSE: SBE) is a shell company formed for the purpose of effecting a merger, capital stock exchange, stock purchase, asset acquisition, restructuring, or related business grouping with one or more businesses. On 24 September 2020, SBE informed the market that it has entered into a definitive business combination deal with ChargePoint, Inc., a leading electric vehicle company. As per the deal, ChargePoint will receive $683 million in cash, resulting in a total pro forma equity value of ~3 billion. The proceeds from the transaction will be utilised to repay debt, fund operation and for general corporate purpose. Following the deal, the combined company will be listed on NYSE under the name ChargePoint Holdings, Inc. The deal is likely to close on 31^st December 2020.

September 2020 Quarter Results: During the quarter, the company spent $762.7K on general and administrative expenses and incurred franchise tax expenses of $50K. For the quarter, the company incurred a net loss of $792.9K. At the end of September quarter, the company had total cash of $11.4k and total assets of $317.2 million.

Key Highlights (Source: Company Reports)

What to Expect: ChargePoint expects its revenues to increase at a CAGR of 60% from 2021 to 2026. Further, the company expects a significant improvement in gross profit and adjusted EBITDA, during the same time span.

Stock Recommendation: The company continues to utilize the network and industry experience of its management team and is seeking an initial business combination and employing its acquisition strategy. The stock of SBE has provided a return of 125.7% in the last one month and is trading close to its 52-week high of $42.30. On the technical analysis front, the stock has a support level of ~$35.5 and resistance of ~$37.3. Although the combined business has a decent long-term prospect in the EV segment, however, given the recent spike in the stock price over the last one-month, current trading levels, losses in business, limited financial information and the key risks, the stock does not seem at a comfortable position to enter at the current levels. Hence, we suggest investors to avoid the stock at the closing price of $36.37, up by 10.55% on 7 December 2020.

HEXO Corp.

HEXO Repositions UP Cannabis Brand: HEXO Corp. (NYSE: HEXO) is a consumer goods packaging cannabis company, engaged in creating and distributing products to serve the worldwide cannabis market. On 1 December 2020, HEXO informed the market regarding the reposition of the UP-Cannabis brand to enhance the overall quality and freshness, at a fair price.

Other Recent Update: HEXO also informed the market about a proposed consolidation of its common shares based on 8 pre-consolidation shares for 1 post-consolidation share in order to regain compliance with the US$1.00 minimum share price in order to fulfil the listing standard of the New York Stock Exchange.

4QFY20 Key Financial Highlights: During the quarter, the company reported net revenues of $27.1 million, up 76% year over year. During the quarter, gross revenues also increased 76% year over year and came in at $36.1 million, the highest in the company’s history. Adjusted EBITDA loss for the quarter came in at $3.25million, depicting an improvement of 21% from the previous quarter. The company’s gross margins before adjustments stood at 42%, as the company remained on track to provide better quality products to its consumers. Cash used from operations came in at $3.8 million.

Figures in ‘000

Key Highlights (Source: Company Reports)

What to Expect: HEXO remains on track to unveil automation and implementing processes and procedures that are expected to enhance efficiency and strengthen its position as a leader in the Canadian marketplace. The company is set to report its 1QFY21 results on 14 December 2020. The company will also conduct its annual general meeting on 11 December 2020.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of HEXO closed at $1.01 with a market capitalization of ~$488.3 million. The stock went up ~48.5% in the last three-month. On a technical analysis front, the stock has a support level of ~$0.95 and a resistance level of ~$2.2. Debt to equity ratio of the company stood at 0.16x in FY’20 as compared to 0.04x in FY19. Considering the above factors, we have valued the stock using an EV/sales multiple based illustrative relative valuation method and arrived at a target price with limited upside potential. Considering the spike in the stock price over the last three month, uncertainty related to regulatory developments and future potential, proposed reverse stock split in the month of October, high debt to equity ratio and limited upside, we are of the view that most of the positive factors of the company have been discounted at current trading levels. Hence, we suggest investors to wait for a better entry level and give an “Expensive” rating on the stock at the closing price of $1.01, down by 6.48% on 7 December 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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