The Ecofibre Ltd (ASX: EOF) share price is on watch this morning after an impressive earnings report. It produces non-psychoactive hemp products for distribution in the United States and Australia. The company's primary product is cannabidiol (CBD) which is used to create nutraceutical products. Other products in this category include dietary supplements, vitamins, fortified dairy products, and citrus fruits and many others.
The company reported a 42% increase in top line revenues, and an eye watering 119% increase in net profit after tax (NPAT). The year of the coronavirus pandemic has been a foundational year for this innovating company. Indeed, it has built the infrastructure it needs to grow rapidly into a very large addressable market.
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Why is the Ecofibre share price on watch?
The Ecofibre share price is likely to see an impact after announcing top line revenue reached $50.7 million in its first full year as a publicly listed company. In fact, the company's gross margin was 76%. This is the margin between revenue and the cost of producing the product. With the addition of all other operating costs, the NPAT margin was 25.9%. These large margins clearly show the high value nature of this business. Moreover, the company was able to achieve a return on equity (ROE) of 20.9%, while increasing net assets by 48.9%.
The company has a range of subsidiaries. However, most importantly for the Ecofibre share price is Ananda health. This is the leading nutraceutical product manufacturer in retail pharmaceutical sales channel in the United States. Moreover, Ananda health recently signed a deal with CVS Pharmacy, the largest retail pharmacy company in the US. This speaks highly of the quality of Ananda Health products.
Within Australia, all Ananda hemp products are available under the Special Access Scheme (SAS) and Authorised Prescriber scheme. Health practitioners are prescribing the product for a range of conditions. In fact, a close friend of mine with multiple sclerosis is using it.
Ecofibre food products are available at Woolworths Group Ltd (ASX: WOW) stores under the 'Macro' brand, and through selected IGA stores under the Ananda Food brand. In addition, these products are sold wholesale to food manufacturers and other distributors. This revenue stream is still unprofitable, but it has improved on FY19.
New revenue streams
The company commercialised its new Hemp Black line of clothing in FY20. This project started off 2 years ago with technology development at Thomas Jefferson University. Even without the sustainability impacts, hemp fibre is lightweight and absorbent, and has three times the tensile strength of cotton.
In April, the subsidiary was ready to launch with Yoga wear to demonstrate the quality and functionality of its technologies. However, fortunately it pivoted to masks and neck gaiters to help in the fight against coronavirus. As a result, the subsidiary broke even in FY20. On 29 July, the company announced the acquisition of a portfolio of companies under the business TexInnovate, an advanced textile manufacturer. This gives Hemp Black capabilities throughout the value chain. TexInnovate also brings a number of clients with it.
Alongside the financial information above, I think this is another demonstration of the managerial capability of Ecofibre. As well as its ability to pivot rapidly. Patents are pending on clothing and mask designs, as well as many patents over the fabric and processes the company has developed.
Foolish Takeaway
I think the Ecofibre share price is a growth opportunity for ASX investors. It is the sector leader in the very important retail pharmacy channel for its nutraceutical product. This sector that is likely to be worth greater than $722 billion globally by 2027. This gives it a first mover advantage in a wide open market; just as Afterpay Ltd (ASX: APT) had in Australia in the beginning. Furthermore, the company is committed to continue with clinical testing and research.
For me personally, the actions of management so far give me a strong sense of their competence and business acumen. I believe they are very well positioned for growth in a range of areas, although I am not sure about the food revenue stream. Regardless of that, the company is valued at $919.97 million and has a price to earnings ratio of 63.36. I think the high earnings multiple is justified, and I see this as a strong growth candidate over the next 12 months and beyond.
