An amended cannabis agreement with an industry heavyweight has no material bearing on the investment thesis for cannabis extraction company Neptune Wellness (Neptune Wellness Stock Quote, Chart, News TSX:NEPT), says GMP Securities analyst Justin Keywood, who sent a flash update to clients on Wednesday.
The analyst today kept his “Buy” recommendation and $8.00 target price for NEPT, which at press time translated to a projected 12-month return of 125 per cent.
Laval, Quebec’s Neptune Wellness announced on Wednesday an amended and restated processing agreement with Canopy Growth Corp.
No details were presented with the announcement other than to say that the two companies mutually decided to review the terms of their agreement while keeping the three-year term unchanged and agreed to an amended schedule of processing volumes committed to Neptune by Canopy.
“Canopy continues to be an important customer for Neptune and both parties are looking forward to maintaining and capturing more business opportunities as the market evolves. As a result of the revised terms, Neptune expects to reduce its client concentration risk and diversify its customer base,” says Neptune in the press release.
Keywood says that the new contracted volume is likely much lower but with better pricing and the removal of certain prohibitive clauses.
“Overall, we see the news as not materially affecting our forecasts and always assumed that NEPT would be diversifying its revenue base. The amended agreement may also free up capacity for higher margin sales with positive implications over the longer term,” wrote Keywood.
The analyst contends that Neptune offers investors “unique exposure” to the legal cannabis and hemp extraction services across different geographies in both the business-to-business and business-to-consumer markets.
“Although Cannabis sales were minor in Q2 and expenses increased, we expect progressive results ahead, highlighting the benefits of significant investments made,” Keywood wrote.
Neptune reported its second quarter financials on November 11, showing total revenues for the three months ended September 30 of $6.5 million, a 49-per-cent increase sequentially but down eight per cent from a year prior. Adjusted EBITDA dropped to negative $4.6 million as the company invested in its cannabis segment which came online starting in March of 2019.
In the quarterly commentary, CEO Michael Cammarata said that in recent months he has been focused on developing Neptune’s B2B and B2C strategy for the US market.
“According to most estimates, the US hemp-derived CBD market is expected to exceed US$20 billion 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 online with rollout commencing in the first half of CY2020,” said Cammarata.
Keywood has praise for Neptune’s management team which he calls solid and supportive of the company’s growth initiatives.
“Our conversations with one of NEPT’s Cannabis customers support confidence in management’s ability to execute as well,” the analyst wrote.
The analyst thinks Neptune is a cheap stock compared to its peers and thus offers an opportunity for investors. He estimates that NEPT is currently trading at a discounted multiple of 5.7x fiscal 2021 EBITDA and is basing his target price on a 15x fiscal 2021 EBITDA valuation.
Trailing off in recent months from a high of $8.60 in late July, NEPT currently sits at $3.68 per share, which is up 6.4 per cent for the year.