Excitement for Neptune Wellness Solutions’ (TSX, Nasdaq:NEPT) opportunity in cannabis oils has pushed the stock to the point where Echelon Wealth Partners analyst Douglas Loe thinks it is now fully valued.
This morning, in New York, Neptune held its annual investor day, where management presented its “Cannabis Business Roadmap”.
“Today marks an important milestone as we present a comprehensive overview to investors of our Cannabis Business Roadmap strategy. Our work on this new and potentially very large growth market, estimated at CA$7.8 billion1 in Canada alone in 2021, started more than 18 months ago. Since then, we have worked diligently to analyze the market potential and opportunities for Neptune in that industry,” said CEO Jim Hamilton. “Recently, we announced capital expenditures of $5 million to make our GMP certified Sherbrooke facility ready and compliant for the extraction of cannabis oil. Considering the build-up period and regulatory framework, we anticipate that we will start manufacturing cannabis oil by Q3 2018. In August 2017, the divestiture of our bulk krill oil business and IP allowed us to significantly strengthen our balance sheet. This transformational strategic decision has no doubt helped accelerate our move from a small and mature krill oil market into much larger market opportunities. We strongly believe that our GMP certified facility as well as our core competencies in science, regulatory affairs, formulation, commercialization and oil extraction represent key competitive factors of differentiation and the foundation to our future success. Our Vision may be ambitious but we aim to become the world’s center of excellence for cannabinoid extracts and delivery forms.”
Loe, who attended today’s event, says the pace at which the inititave is moving is impressive.
“We were encouraged to hear that Neptune is already well advanced on its license application under Health Canada’s Access to Cannabis for Medical Purposes Regulations (ACMPR) program to produce cannabis oil for medical and nutritional supplement markets, projecting that Sherbrooke could go commercial on this initiative by late FQ219 (CQ318) and this timeline seems reasonable to us and actually about a quarter earlier than our model previously assumed,” the analyst says.
But Loe says following a strong recent run that has seen shares of Neptune double, he sees the stock as fully valued. In a research update to clients today, the analyst raised his one-year price target on Neptune from $1.50 to $2.20, but lowered his rating on the stock from “BUY” to “HOLD”. His new target implied a return of 4.3 per cent at the time of publication.
The Echelon Wealth Partners analyst did leave the window open for a potential re-rating of the stock
“Neptune calculates that if it could capture 5% of this market, it could generate gross revenue of up to $114M by that year,” Loe said. “We will be more conservative than that in our own valuation for now, but if Neptune can feature Sherbrooke as a high-quality, high-throughput cannabis oil producer over time, and if importantly, it can consummate one or more cannabis oil production alliances with existing licensed producers in the next year or two, we believe we could have abundant justification to upwardly revise our projections.”
Loe thinks Neptune will generate Adjusted EBITDA of negative $3.3-million on revenue of $27.3-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $100,000 on a topline of $29.4-million the following year.