Neptune Wellness has a 44 per cent upside, says GMP Securities

GMP Securities analyst Ryan Macdonell is giving the thumbs up to cannabis extraction company Neptune Wellness Solutions’ (Neptune Wellness Solutions Stock Quote, Chart TSX:NEPT) first foray into the CBD market in the United States with the purchase of SugarLeaf Labs.

In an equity research update on Tuesday, Macdonell kept his “Buy” rating but raised his target from $7.00 to $7.50.

The US$18-million deal for North Carolina-based hemp extraction company SugarLeaf Labs includes a number of performance milestones for adjusted EBITDA over the next three years which could bring the total consideration to US$150 million. Macdonell calls the transaction structure attractive and likes the takeout multiple of 5x EBITDA, which he sees as much lower than other transactions in the Canadian cannabis space which are averaging 3x forward sales.

“Neptune is set to become the first Canadian extractor under coverage to enter the US market. It is difficult to assess the potential market size for CBD-based products in the US given it is only just beginning. However, CBD extracts could find their way into a variety of health and wellness products, a domain well-suited to NEPT’s core competencies,” says Macdonell.

“We expect that Neptune shares have not reacted more positively to this announcement due to the overhang of a potential equity financing. Once the market obtains clarity of the company’s financing plans, we expect NEPT shares could re-rate higher,” he says.

The analyst thinks that Neptune will generate a fiscal 2019 EBITDA loss of $8.2 million on revenues of $25.3 million and fiscal 2020 EBITDA of $15.9 million on a top line of $65.1 million. His $7.50 target represented a projected return of 44 per cent at the time of publication.