Neptune Wellness’s new acquisition looks good, says Echelon Wealth

Echelon Wealth Partners analyst Douglas Loe says that he’s positive on the new deal by cannabis extract company Neptune Wellness Solution (Neptune Wellness Solutions Stock Quote, Chart TSX:NEPT) and its bid to acquire US hemp extraction and formulation company SugarLeaf Labs.

In an update to clients Thursday, Loe maintained his “Buy” rating and $8.00 target price on NEPT, saying there’s clear upside to his current forecasts once SugarLeaf is fully integrated into Neptune’s operations.

Laval, Quebec’s Neptune Wellness announced on Thursday that it had signed a definitive agreement to acquire SugarLeaf and all of its assets, which include a 24,000 sq. ft. facility, for US$24 million in upfront consideration but with substantial EBITDA earn-out provisions that could raise total consideration over time to US$150 million.

Loe says that with what he calls the strong medical potential of cannabidiol, a hemp derivative, in the US medical/nutritional space, the deal, which Loe calls Neptune’s most substantial and most strategic, operation transaction to date, looks like a good one for the company.

“We are positive about Neptune’s new strategic interests in establishing US-based hemp extraction capabilities and with a firm that has abundant existing capacity to grow ethanol-based extraction activities without need for new growth capex to augment capacity down the road,” says Loe.

“While we assume that Sherbrooke and SugarLeaf Labs’ will sell cannabis oil/hemp extract through distinct regional distribution channels (and source starting material from distinct growers), there is clear potential for sharing insights on manufacturing efficiencies that the firms could integrate into future operations (both use ethanol as extraction solvent, though Neptune clearly has expertise in using acetone as an extraction solvent if/when there are economic reasons for adapting to its use down the road),” he says.

Loe notes that it’s clear from Neptune’s balance sheet as of fiscal third quarter 2019 that the company will need to source capital to fund the purchase, something confirmed by the company in its press release and likely to take the form of new debt and/or equity.

Saying there may be upside to his forecasts, the analyst is calling for fiscal 2019 consolidated revenue and Adjusted EBITDA of $26.1 million and $4.4 million, respectively. His $8.00 target represented a projected return of 46 per cent at the time of publication.