Down Grade ....Echelon Wealth Partners After another “transitional” quarter for Neptune Wellness Solutions Inc. (NEPT-T, NEPT-Q), Echelon Wealth Partners analyst Douglas Loe said he was compelled to revisit his near-term cannabis and hemp oil projections.
On Thursday, the Quebec-based cannabinoid extraction company reported third-quarter revenue and EBITDA that fell short of Mr. Loe’s expectations. However, he did note the earnings miss was due largely to rising expenses to build its commercial infrastructure, which he said “is probably justified in the near-term and consistent with our investment thesis on Neptune’s still-evolving cannabis/hemp-based oil-extraction franchise.”
“Neptune separately provided industry commentary on the cannabis/hemp commercial macroenvironment that was predictably cautious, and we are revising our medium-term revenue growth projections for oil extraction activities at both QC-based Sherbrooke and U.S.-based SugarLeaf accordingly,” he said.
“We stand by our view that Neptune is well-positioned to exploit (and quickly) any shifts in cannabis/hemp oil demand through its existing capacity at Sherbrooke and SugarLeaf and we remain positive about the firm’s strategy to explore ways to create recognized brands in cannabis/hemp consumer markets, for which brand equity will take time to mature. Accordingly, SugarLeaf’s imminent revenue softness when taken together with US price softness in the emerging hemp-derived cannabidiol (CBD) oil market (about 60 per cent year-over-year) and with Neptune’s write-down of $44.1-million on carrying value of future EBITDA-based earn-outs (and goodwill was diminished down to $71.1-million from $115.7-million in FQ220, along with fair value on SugarLeaf contingent considerations now set at $34.0-million, down from $74.7-million last quarter), we are revising our medium-term revenue projections for SugarLeaf during the F2021-F2023 period.”
Keeping a “buy” rating for Neptune shares, Mr. Loe dropped his target to $5.50 from $10. The average is $5.42.
“Our revised PT reflects our more cautious but still positive view on Neptune’s emerging cannabis/hemp oil extraction franchise and the firm’s abilities to exploit capacity at existing facilities in coming quarters," he said. "At current levels, our revised PT still corresponds to a one-year return of 121% and we are thus maintaining our BUY rating on the stock.”