Ceapro Inc. (TSXV: CZO) is engaged in the development and application of 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.

 Key highlights

• Positive outlook for cosmeceutical business: We expect the company’s cosmeceuticals-based business continue to grow and provide positive cash flows to support the business model. It is repositioning itself from a contract manufacturer/commodity company to a high-value life science/biopharmaceutical company involved in nutraceuticals and pharmaceuticals. Moreover, it has all the key components for success, including a solid foundation, a highly competent team, a healthy balance sheet, and a strong technology and diversified product portfolio.

• Reported higher sales: The company posted higher sales of CAD 4.5 million for the third quarter of 2021 and CAD 13.6 million for the first nine months of 2021 compared to CAD 3.4 million and CAD 12.4 million for the comparative periods in 2020. The 10% increase in sales for the first nine months is mainly due to a significant increase in sales of avenanthramides in the USA compared to the same period in 2020.

• Clocking elevated margins: The company's net profit increased in the reporting period, thanks to a higher margin of 65.2% in comparison to 47.8% in 2020. The purchase of outstanding source material and the careful labor of highly skilled staff operating in only one site in 2021 compared to two sites in 2020 resulted in improved profitability.

• Strong liquidity: On September 30, 2021, the Company had cash and cash equivalents of CAD 7.4 million, up from CAD 5.4 million on December 31, 2020, and it manages credit risk on its cash balances by keeping bank accounts with Canadian Chartered Banks and investing in low-risk, high-liquidity investments.

Risks associated with investment

The company is exposed to a varied range of risks ranging from regulatory risks, uncertainty in product development and related clinical trials and validation studies. Furthermore, the company is exposed to forex risks, and investor are exposed to liquidity risk given the penny-cap market categorization of the company.

Financial overview of Q3 2021 (Expressed in CAD)

Source: Company Filing

• Total revenue in Q3 2021, increased by 32.4% to CAD 4.5 million compared to CAD 3.5 million in the previous corresponding period. The Company benefited from higher sales of avenanthramides in the current quarter.
• Gross profit increased to CAD 2.9 million in the reported period against CAD 1.7 million, mainly due to lower cost of goods sold and higher revenue.
• Income from operations stood at CAD 0.74 million against CAD 0.34 million in Q3 2020, primarily due to higher gross profit, partially offset by increased R&D expense.
• Net income in Q3 2021, reported by the company increased to CAD 0.88 million against CAD 0.19 million in pcp.

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.

On the valuation front, the stock is trading at an EV/SALES multiple of 2.2x on an TTM basis as compared to the industry (Healthcare) median of 5.0x. Hence considering the facts mentioned above and rationales, we recommend a “Hold” rating on the stock with a lower double-digit upside (in percentage term) at the closing price of CAD 0.52 on April 12, 2022.

One-Year Technical Price Chart (as on April 12, 2022). Source: REFINITIV, Analysis by Kalkine Group

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