Buy Neptune Wellness as it moves into cannabis, Echelon says

A milestone for Neptune Wellness Solutions (Neptune Wellness Solutions Stock Quote, Chart TSX:NEPT, Nasdaq:NEPT) has Echelon Wealth Partners analyst Doug Loe reiterating his bullish target on the stock.

On Tuesday, Neptune announced it is now shipping cannabis extracts from its facility in Sherbrooke, Quebec.

“The quality of the extracts in Neptune’s first production runs at our state-of-the-art facility has been terrific, and we are proud to begin deliveries. This marks an important step forward in the execution of our vision to lever our decades of extraction and wellness industry experience towards becoming the world’s leader in the extraction, purification and formulation of value-added, differentiated cannabis products,” said Jim Hamilton, president and chief executive officer of Neptune.

Loe says this development is an unambiguous positive, though he expects things will start slowly.

“Transition to commercial cannabis oil operations is positive on its own, with Neptune sending clear signals that demand for greater capacity already exists, as our model assumes: We still expect Health Canada regulatory approval on new capacity to transpire within a quarter or so after ethanol solvent extraction capabilities are established, and this expectation is already embedded in our F2020/21 cannabis oil revenue projections,” the analyst says. “Neptune did not quantify the magnitude of its FQ419 cannabis oil shipment, though we assume initial shipments are modest and well below current annual processing capacity of 30 MTs, and we separately assume that the shipment is destined for its major distribution partner Canopy Growth though Neptune did not specify this in its announcement. Though our model did not assume that Neptune would formally book cannabis oil-based revenue until FQ120, we were confident that its Health Canada-licensed facility was producing cannabis oil inventory for imminent shipment, as has now transpired.”

In a research update to clients today, Loe maintained his “Buy” rating and one-year price target of $8.00 on NEPT, implying a return of 98 per cent at the time of publication.

Loe thinks Neptune will post Adjusted EBITDA of $4.4-million on Consolidated Revenue of $26.1-million in fiscal 2019. He expects those numbers will improve to EBITDA of $12.2-million on a topline of $61.4-million the following year.

“Neptune is already planning for cannabis oil capacity expansion that could fuel revenue growth well beyond our medium-term revenue forecasts,” the analyst adds.