Ceapro Inc. (TSXV: CZO) is a Canadian biotechnology company involved in the development of proprietary extraction technology. The group uses this technology to the production of extracts and “active ingredients” from oats and other renewable plant resources. Ceapro adds further value to its extracts by supporting their use in cosmeceutical, nutraceutical, and therapeutics products for humans and animals. The Company has a broad range of expertise in natural product chemistry, microbiology, biochemistry, immunology and process engineering. Ceapro Inc has a production facility in Leduc, Alberta, Canada and research laboratories in Edmonton and Charlottetown, Prince Edward Island, Canada.

Revenue Mix

Source: Annual Report

Investment Rationale

• A Growth Stage Biotech Company: The group is a growth-stage biotechnology company involved in the development and commercialization of "active ingredients" derived from oats and other renewable plant resources for the healthcare and cosmetic industries. The company has a broad range of expertise in natural product chemistry, microbiology, biochemistry, immunology, and process engineering. These skills merge in the fields of active ingredients, biopharmaceuticals, and drug-delivery solutions. Ceapro's patented process technologies include Pressurized Gas eXpanded (PGX) technology which is a unique and disruptive technology with several key advantages over conventional drying and purification methods that can be used to generate novel high-value biopolymers and biocomposites structures with micro or nano-sized features. 

• Supplying Ingredients to Well-known Personal Care and Cosmetic Industries: Oat beta-glucan and avenanthramides, are found in many household names, cosmetic and personal care brands. These products are manufactured from Ceapro's proprietary oat extraction manufacturing technology and are known for their well-documented health benefits. Oat beta-glucan effectively stimulates collagen synthesis and deeply moisturizes the skin (epidermis and dermis), thereby improving skin restructuring, decreasing wrinkles and allowing wound healing with minimal scarring. When taken orally, oat beta-glucan has been shown to improve cholesterol levels and therefore has "heart health" approved health claims in Canada, the United States and Europe. Avenanthramides are polyphenolic compounds found exclusively in oats which act as natural antioxidant, anti-irritant and anti-inflammatory. 

• Achieved the First Milestone in Product Pipeline Development: During the third quarter of FY20, the company achieved the first milestones in the successful development of PGX-processed yeast beta-glucan product as a potential inhalable therapeutic for COVID-19 and other fibrotic endpoint diseases of the lung. Further, the company conducted an in-vitro study with human cell lines demonstrating that PGX-YBG obtained from different sources exhibited a significant stimulatory effect on human immune response through activation of beta-glucan specific Dectin receptors.

• Registered a Technical Breakout on Daily Price Chart: On the daily price chart, CZO shares registered a technical breakout, with stock in the last trading session traded above the crucial short-term moving averages of 50-day SMA. This is considered to be a bullish breakout. Also, the stock closed above this level, making the trend stronger. Further, we can potentially witness a golden cross over where short-term 50-day SMA crossing over long-term 200-day SMA, which considered to be a very strong bullish indicator. Also, 14-day RSI is hovering in a neutral zone, with a bullish bias at 55.

Technical Price Chart (as on May 25, 2021). Analysis by Kalkine Group

• Strong Liquidity Position: The company maintains a strong liquidity position with the current ratio of 7.22x as compared to the industry median of 2.11x. This implies sufficient liquidity to cover the short-term obligations. Further, the company has cash and cash equivalents in the amount of CAD 5.3 million. The current liquidity position seems to be sufficient to fund its operations and can weather short-term challenges. 

• Stable Outlook: We expect Ceapro’s cosmeceuticals based business to continue to grow and provide positive cash flows to support the expansion to a new business model. The company is repositioning itself from a contract manufacturer/commodity company to a high-value life science/biopharmaceutical company involved in nutraceuticals and pharmaceuticals. Moreover, Ceapro has all the key components for success, including a solid foundation, a highly competent team, a healthy balance sheet, and a strong technology and product portfolio with the potential of getting into very large markets. 

• Risk Associated with Investment: Biotechnology companies are subject to a number of risks and uncertainties inherent in the development of any new technology. General business risks include uncertainty in product development and related clinical trials and validation studies, the regulatory environment, for example, delays or denial of approvals to market our products, the impact of technological change and competing technologies, the ability to protect and enforce our patent portfolio and intellectual property assets.

Financial Highlights: Q1FY21

Data Source: Company

• Total revenue increased by approximately CAD 0.429 million or 10% from CAD 4.273 million in the first quarter of 2020 to CAD 4.702 million in the first quarter of 2021.
• Product sales volume for the first quarter ended March 31, 2021, was also 10% higher than the comparative quarter, and the increase was primarily driven by higher beta-glucan sales.
• However, the cost of goods sold increased by 29%. The increase in the cost of goods sold was higher than the increase in revenue which has contributed to an overall decrease in the gross margin percentage from 56% to 48%.
• While the gross margin percentage in the first quarter of 2021 was lower than the comparative quarter in 2020, it recorded an improvement over the 37% margin experienced in the fourth quarter of 2020 following the integration of two manufacturing sites under one single site.
• During the three-month period ended March 31, 2021, research and development expenses increased by CAD 0.315 million or 63%. The increase was primarily due to higher expenditures related to the pilot clinical study for the development of beta-glucan as a cholesterol reducer, higher regulatory and patent expense, and higher salaries and benefits expense offset partially due to lower expenditures on other projects.
• Research and development salaries expense is slightly higher in the current quarter compared to the prior quarter partly due to additional salary from the hiring of a new PGX team member in September of 2020 and partly due to lower grant funding received in the current quarter offset partially by lower share-based payments expense in the current quarter as there were no stock options or RSU’s granted.
• General and administrative expense for the three-month period ended March 31, 2021, decreased by CAD 0.153 million or 18% from the comparative quarter.
• Sales and marketing expense for the three-month period ended March 31, 2021, decreased by CAD 0.035 million or 73% from the comparative quarter.
• Finance costs decreased by 8% or CAD 8,000 in the three-month period ended March 31, 2021, from CAD 0.102 million in 2020 to CAD 0.094 million. The decrease was partially attributable to lower accretion on the CAAP loan and lower interest on the lease liabilities as the principal portions of these liabilities are lower from ongoing repayment. The decrease is partially due to there being no interest on long-debt debt or transactions costs in the current period as the long-term debt was fully repaid in July 2020.

Top Five Shareholders

The top-5 Shareholders together hold around 7.32% stake in the company, with Zupancic (John) and Gagnon (Gilles R) are holding maximum interest in the company, with outstanding position of 2.32% and 2.05%, respectively.

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: The company has a business model with a highly competent team, a healthy balance sheet, and a strong technology and product portfolio with the potential of getting into very large markets. Further looking at the recent quarter upsurge in the R&D expenses, we believe the product portfolio is likely to bolster in the near term as higher R&D cost shows that the company is diligently working on new product development and enhancement of the efficacy of the existing product portfolio. Therefore, margin decline in the first quarter of 2021 looks temporary, and with the adoption of new technology and products, we see the financial position to further improve in the near future.

We consider that the first quarter performance of the company was quite strong with revenue surged 10% on a YoY basis, along with a strong balance sheet maintained by the company.

On the technical charts, a golden-cross pattern could be witnesses in the stock in the next few trading session, where crucial short-term 50-day SMA would cross over long-term 200-day SMAs. This would place the stock in a long-term bull run. Based on technical analysis, the stock has support at CAD 0.54 level.

Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 0.67 on May 25, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

1-Year Price (May 25, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on May 26, 2021 price as well.

Disclaimer

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