Neptune Wellness Solutions is undervalued, GMP says

Look for Neptune Wellness Solutions (Neptune Wellness Solutions Stock Quote, Chart, News TSX:NEPT) to start climbing, says GMP Securities analyst Ryan Macdonell, who calls the company’s newly announced collaboration with International Flavors & Fragrances a strong endorsement for Neptune.

Laval, Quebec-based extraction and wellness product formulation company Neptune on Wednesday announced that it is actively pursuing a product development collaboration with International Flavors & Fragrances (IFF) to co-develop hemp-derived CBD products for the US market.

“IFF is a well-recognized leader and innovator in taste, scent, nutrition and ingredients, and we could not be more excited at the potential of combining the resources of our two organizations to develop plant-based consumer products, including hemp-derived CBD products,” said Michael Cammarata, CEO of Neptune. “The formulation and technological expertise that IFF cumulates will greatly benefit Neptune in accelerating its market penetration in the US CBD market. This partnership aligns well with our growth strategy of expanding core customers and of supporting consumer packaged goods companies and fragrance houses’ expansion into the CBD market.”

According to Macdonell IFF has about 33,000 B2B customers globally, is involved in the production of over 150,000 products sold annually and generated nearly US$4 billion in sales in 2018.

“Neptune is IFF’s first partner in the cannabis or hemp-derived CBD space. Therefore, not only is the partnership a significant endorsement for Neptune but we expect it also could amount to considerable revenue for NEPT over the long-term as they launch their co-developed products,” writes Macdonell in a client update on Thursday.

The analyst says Neptune’s recently appointed CEO Michael Cammarata worked previously at Unilever and thus that his extensive network of relationships in many CPG industries could lead to more partnerships in the future for Neptune.

“While a definitive agreement has not yet been reached, we expect that the companies intend to jointly create a line of branded products and launch them in the US market. The potential terms of the agreement have not been disclosed, but we believe it is worth noting that moving further along the value chain in the US CBD industry towards the end consumer could result in a larger share of overall revenue compared to hemp tolling alone,” Macdonell says.

The analyst says more news on the partnership in the coming weeks and months may lead to improved visibility and cause NEPT shares to re-rate towards his target price of $9.00 per share. The analyst has reiterated both his target and “Buy” recommendation for NEPT, saying the company’s valuation stems from its strong growth prospects, its US platform following the acquisition of SugarLeaf and the company’s white labeling experience in nutraceuticals which could be leveraged in the cannabis and hemp space.

Macdonell thinks that NEPT will generate fiscal 2020 (year end March 31) revenue and EBITDA of $66.2 million and $5.1 million, respectively, and fiscal 2021 revenue and EBITDA of $193.0 million and $70.9 million, respectively. His $9.00 target represents a projected 12-month return of 83.3 per cent at the time of publication.