Categories Analysis, Cannabis

Neptune Wellness (NEPT) defies COVID crisis and looks to start FY21 on a high note

Predicts a multi-fold growth in revenues in the first quarter of 2021

In several markets, the cannabis industry was less affected by the coronavirus than most other businesses, even as the authorities in some states declared pot-based products as ‘essential’ during the lockdown. After reporting impressive revenue growth for the March-quarter, Neptune Wellness Solutions (NASDAQ: NEPT) is all set to expand its cannabis portfolio and roll out new products.

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With the legalization of recreational cannabis gathering pace, especially in the Americas, Neptune is witnessing strong sales and the trend was visible in its overall performance in the most recent fiscal quarter.

For the Canada-based cannabinoid extraction company, which has stayed in the red for several quarters, it is high time to create value for shareholders. Interestingly, market watchers are bullish about the prospects of the stock, which recently came out of a long-drawn losing spree. Currently trading above the long-term average, the stock is fairly priced and investors wouldn’t want to ignore the opportunity.

Investing

Having said that, Neptune is not free from the risks associated with cannabis stocks, owing to the general weakness the market has been experiencing since last year. The bright spot for the company is its positive revenue performance in recent quarters, bringing cheer to shareholders who have been patiently waiting for good news. It also adds to the hope that the marijuana grower is turning profitable once again.

In the words of chief executive officer Michael Cammarata, Neptune is “a completely different company than it was only one year ago.” Cammarata is particularly buoyed by the revamped business structure and brand, which is supported by the new leadership team. He has set the ambitious target of achieving around four-fold growth in first-quarter revenue, reflecting the upcoming launch of the first cannabis brand in Canada. Probably, it is the first time Neptune executives issued guidance, demonstrating their confidence in future growth.

“Q4 is the start of that transition, is lowering the capex needs after the one-time costs. But when you look at our actual model that we’re building here, we’re trying to build a very efficient company that has a lower cost infrastructure, that can scale up and down on demand.”

Michael Cammarata, chief executive officer of Neptune Wellness

Turning Around NEPT

The management looks at cost-reduction as a key measure to allow revenues to translate into profit, aided by the revised brand strategy. The bullish outlook implies that Neptune might generate profit in the early months of 2021, unlike in the fourth quarter when the bottom-line was dragged by costs related to investments in the cannabis segment. Cannabis should continue to be the main growth driver, backed by the health and wellness business.

When it comes to market share, the company expects to stay ahead of rivals by leveraging the additional capacity, innovation, and new business wins. Also, strategic deals, such as the acquisition of the Sugarleaf brand and tie-up with chemicals firm IFF that gives Neptune access to several patents and clients, are expected to give the company an edge over others.

The COVID Effect

With the presence of hemp increasing in the personal care space, including its use in hand sanitizers and disinfectants, bodes well for Neptune in this COVID-era. But it will not be easy to convert those opportunities into margins due to the high costs involved, including the rising chemical prices.

“Moving forward, we are focusing on a model that keeps our overhead low while allowing us to be agile and responsive to the market without using a lot of capital. As part of our company’s transformation, we have recently restructured the company into six business units with a sales force that is aligned to each business unit,” said Cammarata.

Loss Widens

In the fourth quarter, net loss widened to C$39.24 million from C$12.38 million in the comparable period of last year, hurt by a significant goodwill impairment charge that was partially offset by a one-time gain. Revenues increased by about two-thirds year-over-year to C$9.5 million during the three-month period, aided by a surge in the cannabis segment.

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Neptune’s shares have pared most of the losses they suffered due to the COVID crisis that drove them to the lowest level in two-and-half years. The stock gained 12% since the beginning of the year and closed the last trading session at $3.00. The value more than halved from the all-time highs seen nearly a year ago.

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