Neptune Wellness Solutions is a buy, Echelon Wealth says

Following the company’s most recent quarterly results, Echelon Wealth Partners analyst Doug Loe is maintaining his bullish stance on Neptune Wellness Solutions (Neptune Wellness Stock Quote, Chart TSX, Nasdaq: NEPT).

On Tuesday, Neptune reported its Q4 and fiscal 2018 results. In the fourth quarter, the company lost $4.8-million on revenue of $7.0-million.

“During the fourth quarter, we sustained an intense pace of activity in developing the cannabis business opportunity, meeting with potential suppliers and partners while continuing to move forward with the regulatory licensing process,” CEO Jim Hamilton said. “As of today, having committed more than 90 per cent of our $5-million approved capital plan to work on-site security, license compliance and CO2 extraction, we remain on track and on budget to complete the first phase of our cannabis commercialization strategy in the middle of 2018. Simultaneously, we began work on phase 2 and successfully completed solvent lab-scale trials. As a consequence, we are very excited that the board approved the $4.8-million investment for phase 2 capacity expansion.”

Loe says Neptune’s pivot to the cannabis space still promises upside.

“Though NEPT shares have stabilized since we upgraded the stock to a BUY in Dec/17, cumulative returns since then are still strong at 98%, excluding the stock’s mercurial ascent in late Q418 (during which we also ascribed a BUY to the stock, though with a different non-cannabinoid-based investment thesis) when it independently generated a return of 78% (we ascribed a pause-to-exhale HOLD to NEPT in between these intervals),” the analyst explains. “We still see considerable upside from Neptune’s proposed endeavors in cannabis oil production, particularly because the firm: (1) already has documented expertise in large-scale solvent extraction of bioactive oils from biological organisms, and while expertise in cannabis oil extraction is not strictly-speaking a proprietary skill, we suspect that advantages in scale and scope could quickly become apparent in Neptune’s already-constructed Sherbrooke facility where krill oil production has long been ongoing at commercial scale, and (2) formulation expertise in how to combine medical relevant oils with other nutritional ingredients is a separate capability for which Neptune could rapidly emerge as a technical leader and for which Neptune’s revenue/EBITDA could grow disproportionately to its peers if market demand for differentiated combination products is strong.”

In a research update to clients today, Loe maintained his “Buy” rating and one-year price target of $5.25 on NEPT, implying a return of 42 per cent at the time of publication.

Loe thinks Neptune will generate EBITDA of $1.0-million on revenue of $38.1-million in fiscal 2019. He expects those numbers will improve to EBITDA of $16.3-million on a topline of $89.0-million the following year.