Ceapro Inc. (TSXV: CZO) is engaged in developing and applying proprietary extraction technology to produce extracts and active ingredients from oats and other renewable plant sources. Its operating segments are the Active ingredient product technology industry and the Cosmeceutical industry. Geographically, the company has business operations in Canada, the US, and other countries.

Investment rationale  

• Reported three consecutive quarters of Gross and Net margin expansion: The company has reported decent margin expansion over the past three quarters, Gross margin has improved from 48% in Q1FY21 to 65.2% in Q3FY21, primarily driven by declining average costs/sales and rising profit per unit. EBITDA margin has improved from 24% to 27.5% in the same period, operating margin expanded from 13.2% to 16.3% and net margin surged to 19.4% in Q3FY21 from 11.0% reported in Q1FY21.

Source: REFINITIV, Analysis by Kalkine Group

• Strong balance sheet: The company has maintained a robust balance sheet, with Debt/Equity ratio at the end of September 30, 2021, stood at 0.11x compared to industry median of 0.86x. Moreover, long-term debt is just 8.3% of the total capital, compared to industry median of 28.8%. Also, the company maintains a strong coverage ratio with TTM Interest coverage ratio of the company stood at 5.42x.
• Promising future outlook: The company reported decent performance in the quarter just gone by, looking forward, while considering the ongoing potential economic impact related to COVID-19, evolving consumption trends and escalating inflationary levels we believe Ceapro is well-positioned to once again deliver a strong growth in sales well in line with the positive trend achieved over the last years. With a strong balance sheet, a group of dedicated people, and a solid base business, coupled with the innovative technologies and products that they have developed to enable them to expand, Ceapro is poised to emerge as a successful life science company

Risks associated with investment 

The company is exposed to a variety of risks ranging from uncertainty in product development and related clinical trials and validation studies. Further, company is also exposed to a regulatory environment, for example, delays or denial of approvals to market the products, could impact the company's revenue line. Also, business is exposed to supply chain related bottlenecks in the wake of rising omicron cases across the world. 

Financial Overview of Q3FY21

Source: Company Filing 

• During the Q3FY21, the company’s reported revenue stood at CAD4.52 million, higher from CAD3.48 million the same period of the previous financial year.
• Gross profit during the quarter under consideration jumped by ~77% to ~CAD 2.95 million compared to CAD 1.66 million reported in Q3FY20.
• R&D investments stood at CAD1.40 million for Q3FY21 versus CAD479k in Q3FY20. The phenomenal rise was led by the payments made to Montreal Heart Institute for a clinical trial to assess oat beta-glucan as a potential cholesterol reducer by almost CAD1.0 million during Q3FY21.
• Net profit stood at CAD875k in Q3FY21 versus CAD 192k in Q3FY20, driven by growth in topline, cost control, and margin expansion.
  

Stock recommendation 

The company has reported solid performance in Q3FY21 and well-positioned to deliver strong growth in upcoming quarter. With a strong balance sheet, a group of dedicated people, and a solid base business, coupled with the innovative technologies and products that they have developed to enable them to expand, Ceapro is poised to emerge as a successful life science company. Hence, considering the factors above, we give a “Speculative Buy” recommendation on the stock at the closing market price of CAD 0.55 (as on January 20, 2022).

1-Year Technical Price Chart (as on January 20, 2022). Analysis by Kalkine Group 

Technical Summary Analysis

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 unfavorable 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.

Disclaimer

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