Still more upside to MustGrow Biologics, says Research Capital

The stock has been an incredible performer over the past year and a half, but Research Capital analyst Yue (Toby) Ma continues to see upside to MustGrow Biologics (MustGrow Biologics Stock Quote, Charts, News, Analysts, Financials CSE:MGRO), maintaining a “Speculative Buy” rating and target price of $5.60/share in an update to clients on Wednesday.

Originally known as Duport Capital, Saskatoon-based MustGrow Biologics develops natural biopesticide products from mustard seed which act as a preplant treatment for soil borne diseases and insect pests. The company is also developing bioherbicide and post-harvest food preservation biopesticide products for storage and food and its focus is on compounds AITC and thiocyanate, with TerraMG, a natural form of AITC serving as its lead candidate.

Ma’s latest analysis comes after the company announced it had signed an exclusive research and development agreement with Janssen PMP for certain applications of MustGrow’s Postharvest Food Preservation Technology.

“There has been a growing body of evidence showing that the compound of AITC can be used for postharvest preservation for grains and other produce in storage,” Ma said. “Chemically synthetic AITC is hazardous and environmentally unsafe. MGRO is developing a formulation of mustard seed-derived AITC (which is considered bio-AITC vs. synthetic AITC) for application in postharvest food preservation.”

Under the terms of the agreement, Janssen PMP, which is a division of Janssen Pharmaceutical NV, will have exclusive global rights to test MustGrow’s postharvest food preservation technology in fruits and vegetables, excluding grains, potatoes, bananas and shipping container fumigation while footing the bill for all testing.

“We believe that using our technology as a postharvest treatment in fruits and vegetables may be beneficial to help secure an environmentally sustainable and less wasteful food supply,” said MustGrow CEO Corey Giasson in the company’s April 20 press release. “We are very excited to work with Janssen PMP as they bring more than 50 years of relevant market experience. We anticipate that working together to advance our technology, not only in research and development, but also in potential commercial applications, will assist with driving our strategic path forward.”

The agreement brings Janssen into the fold as a partner for MustGrow, with the companies also having exclusivity agreements with Sumitomo and Bayer for different compounds in different parts of the world.

However, Ma points to a potential risk associated with the three partnerships as they currently do not include commercialization agreements that stipulate how TerraMG would be marketed and sold after it receives regulatory approvals. Ma also points to possible regulatory risk for TerraMG, though he believes it to be low given its status as a second-generation product after the first generation, MustGro Invest, received EPA approval.

After an estimate of bringing in minimal revenue ($13,000) in 2021, Ma forecasts the company to begin bringing in more concrete revenue in 2023 at a projected $4.1 million, with a projected increase to $14.3 million in place for 2024 to start a growth ramp Ma forecasts to reach $40.1 million by the 2028 fiscal year.

From a valuation perspective, Ma forecasts the company’s P/Sales multiple beginning in 2023 at 45.5x, then forecasts a drop to 13x in 2024 before dropping to a projected 7.3x in 2025.

Meanwhile, after forecasting losses of $2.6 million in both 2021 and 2022, Ma projects the company’s EBIT to turn positive in 2023 at $1.3 million for an implied margin of 31.4 per cent. He then forecasts the margin to continue widening through 2028 according to pro forma statements, with the $36.9 million estimate for 2028 implying a margin of 91.9 per cent.

Ma forecasts the company’s EPS to turn positive at $0.03/share, with eventual growth to a projected $0.27/share by 2025. In terms of valuation, Ma forecasts the company’s P/EPS multiple to fall from the initial 152x forecast in 2023 to 16.4x in 2024, then to a projected 10.5x in 2025.

Overall, Ma believes Janssen will be a solid partner to MustGrow as it brings over 50 years of experience in postharvest treatments of fruit to the table, as well as having a strong global distribution network with sales in more than 35 countries worldwide. Ma also expects the company to report product development results and continued business development activity in 2022.

“To date, MGRO has forged exclusive partnerships with three leading global ag companies to advance the development of the two compounds toward regulatory approvals in key global markets,” Ma said. “We view those partnerships as the first but critical step to achieve commercial success down the road.”

MustGrow has gone in the opposite direction to start 2022, posting a 10.4 per cent loss on its stock price since the start of the calendar year. MustGrow had early momentum at $4.18/share on January 7, but it fell off to its lowest point of 2022 on February 9, when it dropped to $3/share. At press time, Ma’s $5.60 target represented a projected one-year return of 44 per cent.