With its extraction operations now up and running and multiple supply agreements in hand, investors should be thinking about Neptune Wellness Solutions (Neptune Wellness Solutions Stock Quote, Chart, News TSX:NEPT), says Douglas Loe, analyst for Echelon Wealth Partners.
On Wednesday, Loe provided clients with an update on the company and stock and reaffirmed his “Buy” rating and $10.00 target price, which represented a projected 12-month return of 115 per cent at the time of publication.
Neptune Wellness Solutions has an upside of 115 per cent, says analyst Loe
Quebec-based nutritional supplement maker Neptune Wellness announced on Wednesday the completion of its Sherbrooke expansion plans, which include new cold ethanol extraction equipment to go along with its CO2 extraction line. The company says that the first shipments of cannabis extracts produced with the ethanol extraction equipment should go out in the coming weeks.
“The Phase II cold ethanol production was completed on budget and is another important milestone in our capacity expansion strategy. We are currently working on Phase IIIa which will bring total annual extraction capacity to 1,500,000 kg. This capacity expansion is necessary to support the execution of Neptune’s growth strategy to become a global leader in cannabis extraction and purification while meeting the growing demand from consumers for natural products,” said Michael Cammarata, CEO, in a press release.
Loe rates the impact of the announcement on his investment thesis for NEPT as “neutral,” saying that the Sherbrooke facility was already approved for ethanol-based extraction back in June, 2019. Nevertheless, the analyst writes that Neptune’s larger expansion plans are evidently necessary, considering the many commercial alliances that the company already has in place in the cannabis industry.
“The firm’s currently-approved cannabis oil extraction capacity in Sherbrooke, independent of newly-acquired capacity in North Carolina with the SugarLeaf Labs acquisition that closed last quarter, is fully absorbed by the firm’s existing supply agreements with leading licensed producers Canopy Growth, Tilray and The Green Organic Dutchman, at least eventually,” writes Loe.
Loe thinks that Neptune could achieve “near-blockbuster status” on its global cannabis and hemp oil sales when its facilities reach full capacity.
“We were encouraged to see Neptune reveal during its FQ120 conference call that existing cannabis/hemp solvent extraction activities could, at peak capacity, generate up to $900 million in annual cannabis/hemp wholesale oil sales or about $450 million at 50 per cent capacity. At this revenue level, that makes some undisclosed assumptions on the relative mix of cannabis and hemp-derived oils to be sure, but regardless, is well above our current cannabis-based revenue forecasts in F2021, F2022 and F2023 of $141.8 million, $216.8 million and $271.0 million. Our model still assumes that Neptune can generate annual revenue from its legacy nutritional supplement formulation/contract manufacturing/consulting operations at Biodroga of $24 million to $28 million during our forecast period,” he writes.
Loe says that he is maintaining an upward bias to his forecasts if Neptune can snag new supply agreements over the next few quarters. Currently, the analyst is calling for fiscal 2020 revenue and adjusted EBITDA of $53.7 million and $13.0 million, respectively, and for fiscal 2021 revenue and adjusted EBITDA of $169.0 million and $61.7 million, respectively.
Early on Thursday morning, Neptune announced an extraction agreement with a large US-based farming services operation. The two-year agreement could reach a total value of more than US$20 million, according to Neptune.