With its cannabis oil extraction in the process of getting off the ground Neptune Wellness Solutions (Neptune Wellness Solutions Stock Quote, Chart TSX:NEPT) is still in its transitional phase, says analyst Douglas Loe of Echelon Wealth Partners, who in a Thursday update to clients reiterated his “Buy” rating and $8.00 target for the stock.
Quebec-based nutritional supplement company Neptune Wellness released its third quarter ended December 31, 2018, financials on Wednesday, with revenues of $6.5 million and a net loss of $3.7 million. Loe says the quarter came in line with his expectations for Neptune’s legacy operations at Biodroga, acquired in 2016, while management’s comments on its emerging cannabis oil extraction operations gave him confidence that the timeline to commercial activity is proceeding as expected.
“As with many of the quarters preceding FQ319, we would characterize the quarter just completed as still being transitional to our eventual expectations that Neptune can generate a more substantive proportion of free cash flow from cannabis oil extraction and formulation efforts, and preparations for this are advancing nicely through pre-specified milestones, including establishing smaller-scale supercritical carbon dioxide extraction capacity and Health Canada recognition of this in Dec/18, and with the firm poised to establish substantial ethanol extraction capacity as soon as by end-of-FQ419,” says Loe.
Loe says Neptune has a number of things going for it, including: (1) an imminently scalable solvent extraction facility in Sherbrooke, QC; (2) the company remains on pace in adaptation to ethanol-based cannabis oil extraction at Sherbrooke; (3) valuable partnerships with industry leading Canopy Growth Corp and Switzerland-based drug formulation/manufacturing giant Lonza Group AG; (4) the ability to dominate the market niche defined by the overlap between medical applications for cannabis and nutritional supplements; (5) sufficient capital to fund operations ($15.6 million in cash and legacy debt of $3.1 million).
The analyst expects NEPT to generate Adjusted EBITDA in 2019 of $4.4 million on revenue of $26.1 million and Adjusted EBITDA in 2020 of $12.2 million on revenue of $61.4 million. His $8.00 target represents a projected 12-month return of 71 per cent at the time of publication.