Buy Neptune Wellness stock for a double, GMP says

Following the company’s second quarter results, GMP Securities analyst Justin Keywood has maintained his “Buy” rating on Neptune Wellness Solutions (Neptune Wellness Stock Quote, Chart, News TSX:NEPT).

On Monday, NEPT reported its Q2, 2020 results. The company lost $20.75-million on revenue of $6.51-million, a topline that was up 49 per cent over the same period last year.

“We have a strong opportunity in the consumer market, and in recent months I have been focused on developing our B2B and B2C strategy for the U.S. market,” CEO Michael Cammarata said. “According to most estimates, the U.S. hemp-derived CBD market is expected to exceed $20-billion (U.S.) at retail in the next five years. This market size is roughly three to four times larger than the expected size of the Canadian cannabis market and represents our largest opportunity today. The collaboration agreement with IFF and the American Media partnership will help raise the awareness of our CBD brand, Forest Remedies. We expect to introduce our first consumer products at retail locations and on-line with rollout commencing in the first half of CY2020.”

Keywood says the second quarter showed that operations are beginning to ramp for Neptune Wellness.

“NEPT reported Q2/F20 (end Sept) results that showed transition as the company begins to ramp up significant operations in both Canada and the U.S. Total Q2 sales were $6.5mm, which included $1.2mm of Cannabis revenue, mainly from Canadian operations with the bulk of sales still from NEPT’s Nutraceutical and distribution business,” the analyst noted. “Expenses were high in Q2 but reflected several unusual items, including elevated stock-based comp expense related to the change in CEO and associated severance costs, along with other one-time charges. Adjusting for these factors, NEPT reported EBITDA of ($4.6mm), still a wider loss than last quarter ($3.6mm) but with an expectation of progression to break-even by fiscal year-end. NEPT also highlighted a slight delay by one month for its cold ethanol extraction processes, now anticipated to be operating at the end of next month (Dec/19).”

The GMP Securities analyst says he is looking past this near term transition

“Although Cannabis sales were minor in Q2 and expenses increased, we expect progressive results ahead, highlighting the benefits of significant investments made,” Keywood wrote. “We also have confidence in the new CEO in driving brand equity, given his past success in the CPG industry. Our conversations with one of NEPT’s Cannabis customers points to a solid value proposition as well, along with confidence in management’s ability to execute. Combined, we see NEPT as offering investors with unique exposure to legal cannabis and hemp extraction services across different geographies in both the B2B and B2C markets. We did adjust forecasts to reflect conservatism for what NEPT is capable of achieving but rapid growth is still expected, including in Q3 results, supporting our investment thesis. A strong balance sheet for expansion also reduces risk with $24mm in net cash and we see the recent pressure following Q2 results as an opportunity.”

In a research update to clients today, Keywood maintained his “Buy” rating and one-year price target of $8.00 on Neptune Wellness Solutions, implying a return of 105.1 per cent at the time of publications.

The analyst thinks NEPT will post revenue of $42.2-million in fiscal 2020 and revenue of $134.9-million the following year.