Neptune Wellness Solutions Inc (NEPT)

[FUNMAN]

Neptune Wellness: Changes Focus And Revenues Soar Upward
Dec. 14, 2020 8:56 AM ET

All of the charts and graphs can be seen at this link:

https://seekingalpha.com/article/4394563-neptune-wellness-changes-focus-and-revenues-soar-upward

By: D. H. Taylor
Long-term horizon, Macro
(4,579 followers)

Summary

• Significant increase in revenue for the quarter with a jump of nearly 250%.

• Continues to initiate deals to grow revenues with significant increases coming soon.

• Book value is below current stock price.


Taking advantage of the changes in attitudes and legalization of cannabis around North America, Neptune Wellness (NEPT) changed gears and retooled its business offerings to take advantage of its current distribution connections and moved into cannabis, CBD, and hemp businesses. The payoff was huge with a 250% increase QoQ in revenues. And, the company posits that they have a solid $100M more in promised business in the future. While they have yet to hit profitability with the new ventures, economies of scale should take over with the increased revenues.

Neptune now focuses on B2B and B2C, of which the latter has proven to have much higher margins for the company. Neptune is executing on their recent plans and the results are impressive.

Let’s take a look at what the company has done the past quarter.

Neptune’s New Focus

Neptune is a company focusing on three distinct business categories: Health and Wellness and Packaged Goods and the cannabis industry, which they believe will be about $130B in annual revenue. The packaged goods segment of their business is now 70% of their revenues, revenues that did not exist in this area of their business one year ago.

The company is now geared towards cannabis and hemp extraction, offering turnkey solutions to businesses looking for products to market, and consumer branding is where they are deriving their business. They grow hemp in the United States and after extraction is selling products direct-to-consumer. In Canada, they have cannabis products that are turnkey for companies wanting to sell their own products direct to consumers or through dispensaries.

I like the mix that Neptune is putting together. Getting a white label business going in cannabis is interesting and a lot of other companies are doing this. If Neptune gets enough companies that they produce products for they can attain economies-of-scale and be profitable from that.

But, the mix of having their own products to sell direct-to-consumers is a plus, I think. Over the past several quarters, I have read many companies talking about switching gears to branding their own brands with premium pricing. These products have premium pricing and offer higher margins for these companies. Neptune will do well with this mix.

Neptune Wellness Revenues

As I mentioned, revenues skyrocketed for the latest quarter:

(Data Source: Neptune Wellness - Author’s Chart)

Never in the history of the company have they printed revenues as high as these. This is a staggering growth achievement for just one quarter. And, as I mentioned, they are already boasting of having orders of up to $100M as a potential. Over a four-quarter period that averages to $25M per quarter, above what they have already printed. But my bet is that they will continue to build on that over the next few quarters and the number will increase in kind.

In Canada, the cannabis industry continues to increase MoM in retail sales numbers. The momentum is in Neptune’s favor that there will be continued increases in orders for their products, both B2B and B2C.

At the same time, hemp products here in the States are growing considerably. CV Sciences (OTCQB:CVSI) does the same thing, creating CBD products from hemp, packaging them on a white label basis for other companies. But, I’ve not been too kind with that company. Neptune appears to be on better footing and may take a relatively similar business model and perform well with it.

Neptune Wellness Operating Efficiency

At the same time, Neptune has become very efficient at costs from operations:

(Data Source: Neptune Holdings - Author’s Chart)

There were significant costs previously, but that was quickly addressed. This was a significant part of the company’s restructuring and rolling out of new products; addressing costs. Guidance for revenues for the full year of 2021 comes in ~$85M and then an additional ~$150M for the fiscal year 2022. Given the company has already significant cost prudence, and the fact that they are lining up significant revenue gains, this will serve well in the next two years to get to profitability.

Neptune Wellness EPS

Earnings per share are still not quite close to profitability:

(Data Source: Neptune Wellness - Author’s Chart)

Despite the sharp increase in revenues and the prudent cost measures the company has addressed and accomplished, Neptune Wellness saw a significant loss for the quarter of some $16M; this translates to the -$0.15 per share loss.

Guidance has IMPROVEMENTS FOR FUTURE QUARTERS. But, this guidance has Neptune still losing money for the next two quarters; albeit at a lesser level.

Neptune Wellness Cash On Hand

One of the downsides of Neptune Wellness is the fact that they are running out of cash:

(Data Source: Neptune Wellness - Author’s Chart)

As I said, for the quarter, Neptune lost ~$16M. They have $6M but just inked a deal with institutional investors - which was oversubscribed - for an additional $12M in funding. This will carry them over for one quarter assuming no changes in the loss line of the ledger. However, with the increased revenues coming in and a possibility that profitability is not far off if they are able to stave off having to raise more capital that would be a solid position for current investors.
However, that is cutting it close. Guidance has the next two quarters' loss at -$0.05 per share for both quarters. This amount of cash would prop the company up for the next two quarters. But, then what? Another capital raise which means further dilution of shares.

However, what if there is a surprise in earnings while the $100M that Neptune has inked with companies starts to come in? This would be the one thing that would really propel the stock upwards if revenues and earnings start rolling in with amounts that surprise upwards. If the market is set for a dilution, but the company does not end up needing an additional capital raise, here is the upwards surprise that would make the news.

Neptune Wellness Book Value

Book value is solid but steady:

(Data Source: Neptune Wellness - Author’s Chart)
My surprise when I looked at total assets/liabilities and total equity was that there were no significant increases in assets despite the conversion of the business. Neptune allocated significant capital to be able to produce a significant amount of new business but there was not an in-kind increase in assets and follow-through with book value.

But, that was not my biggest eyebrow raise with this valuation.

NEPT Stock

Book value for Neptune Wellness is ~$1.04 per share. However, the stock is trading significantly higher, and if you look at this chart, you would think it was about to collapse completely:

(Data Source: Neptune Wellness - Author’s Chart)

I like an amount of margin of safety with an investment. Book value is an excellent metric for determining if a company’s stock lines up with its fundamentals. Keep in mind, you cannot use forward earnings to value this stock simply because projections for the next two quarters come in negative; albeit, better than this quarter’s loss.

So, liquidation value is where I look to see if the stock is undervalued or overvalued. With this stock chart, you are paying a premium here. And, the technicals are saying it is about to fall significantly. The recent selling may be the dilution factor that I mentioned with the capital raise Neptune is doing with the institutional investors.

Overall, this makes me a bit hesitant about purchasing this company.

I have been systematically working my way through a very long list of cannabis companies to build myself a portfolio and writing up analysis here on Seeking Alpha (With many more to go). There are some excellent companies to invest in right now. When I think through that list I can think of several companies that I have analyzed that are substantially undervalued. Because of that, because of the numbers I have been doing, I begin to compare these companies with each other and rationalize that it might be best to pass on one company simply because it does not measure up to many others. Why would I? I’m not forced to invest; I choose to.

Given that, this is one factor, the book value/share price, that makes me hesitant with Neptune. Then, the capital raise and potential for another one which could push the stock lower even further is another factor that makes me hesitant about this stock. I am not saying that this company’s stock will not move higher eventually. But, I am in no rush to put my funds into something, especially a stock that lacks that margin of safety.

The Takeaway: Is Neptune Wellness A Buy?

Management saw an opportunity to make changes to a company that had not seen significant growth like this ever. Those changes that brought in a sharp increase for this quarter are promising even more revenues for the future. With the company’s prudence with their operational costs and SG&A, they are on track to see significant gains towards profitability.

I like very much the mix the company is putting together with hemp products in the United States and cannabis products in Canada as well as packaged products for turnkey business needs. At the same time, they are packaging their own brands and that is where the higher premiums are in the cannabis industry. Because of that, there is a tremendous amount of revenue coming into the company’s hands very soon.

However, Neptune is short on cash and in the process of raising capital. But, it might be that they need even more capital in 9-12 months more. That means another capital raise and more dilution of shares. And, book value is already below the current stock price.

I am very bullish on the cannabis industry. I expect continued gains. Management here has shown they are focused on the key variables that will ensure profitability. Nonetheless, I will pass on this stock. That is not to say Neptune Wellness’s stock will not go upwards. There are too many variables that suggest the stock could drop both right now and just 6 - 12 months from now. At the same time, there are plenty of companies that are starting to turn a profit and simultaneously not seeing the love from Mr. Market. I will focus on those instead.

For these reasons, at this time, I am neutral on Neptune Wellness.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.