Hexo CFO’s Resignation Prompts Double Downgrade at BofA

(Bloomberg) -- The abruptness of Hexo Corp.’s chief financial officer departure raises questions about whether there was more to the move than meets the eye, prompting Bank of America Merrill Lynch to double-downgrade the stock.

“Put simply: a departure that is so abrupt, from a person with CFO experience at other public companies, is concerning, and in our view will leave investors guessing ‘what don’t we know?’ for some time,” analyst Christopher Carey said in a note.

Carey cut his rating on Hexo to underperform from buy and reduced his price target to C$4, a Street low, from C$9. Hexo’s U.S.-listed shares fell 4.9% in pre-market trading.

Hexo said Friday that Michael Monahan, former CFO of Nutrisystem Inc., had resigned effective immediately. In a statement, Monahan said the job required him to spend more time in Canada than he expected and this wasn’t possible given his family’s needs. Monahan joined Hexo in late May.

Read more: Hexo’s Abrupt CFO Resignation ‘No Cause For Alarm,’ MKM Says

“It is difficult to know exact expectations established when Monahan joined the company,” Carey said. “However, we think it’s reasonable to assume the corporate finance organization was less developed than what Monahan had realized, perhaps indicating there remains much work to professionalizing said organization than what he (or the Street) fully appreciated.”

Hexo has said it expects to reach C$400 million of net revenue in fiscal 2020, but Carey believes it will cut that target amid an expected slowdown in the Canadian cannabis market in the second half of calendar 2019.

This was echoed by BMO analyst Tamy Chen, who expects the industry’s third-quarter sales to provinces will decline 20% quarter-over-quarter. This will likely cause Hexo to miss its guidance that revenues will double in its fiscal fourth quarter from the previous period, she said.

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Will Daley

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