A “transitional” quarter for Neptune Technologies & Bioressources (TSX:NTB) still left plenty of things to be positive about, says Euro Pacific Canada analyst Doug Loe.
Last Wednesday, Neptune reported its Q2, 2015 results. The company lost $2.55-million on revenue of $4.37-million, up from $2.62-million in the same period last year.
“We are seeing improving business fundamentals across the corporation, with our Sherbrooke plant fully operational, a healthy sales funnel and increased financial strength,” said CEO Jim Hamilton. “Our plant is now operating above nameplate capacity and we expect to move towards cash flow neutrality by fiscal year-end. This is a reflection of our strategic focus on driving long-term profitable growth through continuous improvement and business transformation. Mario Paradis’s recent appointment as chief financial officer strengthens us further and we are already benefiting from his sound financial leadership.”
Loe says Neptune’s second quarter was clearly a “transitional” one with some difficulties, including the fact that royalty payments from peers are not imminent and a cash balance that is creeping toward cautionary levels.
“We believe capital markets could be cautious on Neptune’s financial risk until we see clear evidence that the cash flow neutrality predicted in Neptune’s FQ216 commentary is well on pace to being achieved,” said Loe. “Accordingly, it will be imperative for Neptune to generate clear signals that it is indeed on pace to trip over cash flow neutrality by the end of FQ316, which as we describe below looks achievable based on working capital swinging to surplus and on EBITDA separately trending toward break-even by FQ416 as our model assumes.”
But Loe also sees many positives in Neptune right now, including the fact that the company’s historic krill oil production capacity has now been restored, the company has operational synergies that appear to be ramping, and has residual value in its intellectual property that should eventually be recognized.
In a research update to clients today, Loe maintained his “Buy” rating on Neptune Technologies & Bioressources, but lowered his one-year target price from $4.50 to $4.25, implying a return of 174% at the time of publication.