Ceapro Inc. (TSXV: CZO) is a Canadian biotechnology company that is engaged in the development of proprietary extraction technology, which is applied for the production of extracts and “active ingredients” from oats and other renewable plants resources. The company adds further value to its extracts by supporting their use in cosmeceutical, nutraceutical, and therapeutics products for humans and animals.

Key Investment Rationales:

• Receives support to conduct PGX Technology Project: During the fourth quarter of FY21, the company received funding assistance of ~CAD 0.48 million for conducting its study on pure powder formulation of yeast beta glucan, which could be potential inhalable therapeutics for fibrotic lung diseases, including COVID-19 conditions. Notably, the assistance came from the National Research Council of Canada Industrial Research Assistance Program (NRC IRAP). This is expected to boost the company’s overall liquidity.

• Attractive prospects from the Cosmeceutical segment: Under the Cosmeceutical segment, the group produces high-end anti-ageing products derived from natural active ingredients and are sold directly to the end-user primarily through website sales online and through select natural products stores. In the recent past, this sector has grown well supported by the growing demand for skin care products across the globe, and the company is well poised to grab a market share in the coming days.

• Exciting Product pipeline: The company is working on the below-mentioned prospects, which is expected to generate a high yield in the coming years.
  1. The company is conducting vivo studies with McMaster University with yeast beta glucan as a potential inhalable therapeutic.
  2. CZO made an agreement with Montreal Heart Institute to commence its Phase 1 clinical trial to assess the safety and tolerability of pharmaceutical grade avenanthramides powder formulation.
  3. The group announced a research agreement with the Boston-based Angiogenesis Foundation to identify vivo bioefficacy of oat beta glucan and avenanthramides in angiogenesis, blood vessel repairs, wound healing and tissue regeneration in various inflammation-based diseases.
  4. The company is conducting the development of new PGX-dried chemical complexes for potential applications under several forms like pills, capsules, fast-dissolving strips and face masks.

• Strong profitability margins: In Q3FY21, the company reported its EBITDA margin and operating margin of 27.5% and 16.3%, respectively, as compared to the industry median of 17.2% and 12%, respectively. This indicates better cost management on an operational level. The company also reported its net margin of 19.4% in Q3FY21, higher than the industry median of 6.7%.

• Impressive liquidity: At the end of Q3FY21, the company reported its cash balance of CAD 7.4 million, which is higher than CAD 5.4 million in Q4FY20. The company mitigates its exposure to credit risk on its cash balances by maintaining its bank accounts with Canadian Chartered Banks and investing in low risk, high liquidity investments.

• Elevated Top-line: For 9MFY21, the company posted its sales of CAD 13.6 million, which is higher than CAD 12.4 million in pcp. This was mainly due to a significant increase in sales of avenanthramides across the USA as compared to the previous corresponding period.

Source: Company Report 

Risk associated with the Investment:

The company might face several setbacks like higher research & development expense, rigorous clinical trials and, product validation etc. Moreover, any denial in the approval coupled with a change in technology would dampen the company’s investments. 

Q3FY21 Financial highlights:

Q3FY21 Income Statement Highlights (Source: Company Report)

• CZO announced its quarterly result, wherein the company posted total revenue of CAD 4.5 million, higher than CAD 3.4 million in pcp. The growth was drive by higher income from Germany and China, partially offset by a slide in income from the United States.
• The company reported a lower cost of goods sold (CAD 1.5 million v/s CAD 1.8 million in pcp), which resulted in a higher gross profit of CAD 2.9 million versus CAD 1.6 million in pcp.
• The quarter was marked by higher research and product development expense (CAD 1.4 million v/s CAD 0.4 million in pcp), while a lower general & administrative expense and a significant slide in the finance costs supported the company’s profitability. Income from operations stood at CAD 0.7 million, grew from CAD 0.3 million in pcp, thanks to the higher gross profit and higher research and product and development expense as mentioned above.
• The company reported its net income of CAD 0.8 million, soared from CAD 0.1 million in pcp, supported by higher income from operations coupled with an inclusion of other income.
  

Top-7 Shareholders:  Top seven shareholders of the company together hold approximately 7.42% stake, Letko, Brosseau & Associates Inc., Dimensional Fund Advisors, L.P. are the major shareholders in the company with an outstanding position of 2.32% and 2.05%, respectively.

Source: REFINITIV, Analysis by Kalkine Group.

 Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

Increase in the top-line of the company illustrates the growing demand for the company’s products, which is a key positive. Moreover, the company has an impressive product pipeline, which is expected to support the company’s upcoming performances. Last but not least, the Cosmeceutical segment offers ample opportunities, while the company is highly poised to take advantage of it. The stock has been valued using the EV to Sales-based relative valuation method and has arrived at a double-digit upside (in percentage terms). Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of CZO at the closing price of CAD 0.435 on March 01, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 01, 2022). Analysis by Kalkine Group

*Recommendation is valid on March 02, 2022, price as well. 

Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

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