Valens GroWorks has a huge upside, AltaCorp Capital says

Cannabis company Valens GroWorks (Valens GroWorks Stock Quote, Chart CSE:VGW) gets a coverage launch from AltaCorp Capital, with analyst David M. Kideckel calling Valens one of the premier businesses within the sector.

Incorporated in 2014 and with trading on the CSE commencing in November of 2016, Vancouver-based Valens is a research-driven extraction and manufacturing company with product development and cultivation activities in the cannabis sector. Kideckel says that Valens is ideally positioned to benefit from the continued development of the cannabis industry, which should see consumer packaged goods and extract products (vape pens, edibles, beverages) taking on a more prominent role of the market.

The analyst notes that Valens has one of the most attractive EBITDA margin profiles in the sector, with projected margins of 47 per cent in fiscal 2019, 58 per cent in fiscal 2020 and 52 per cent by fiscal 2021. Those numbers also make VGW a potential acquisition target.

“Given the relatively high margins on extraction services, larger cannabis producers are incentivized to internalize these processes,” says Kideckel in his coverage launch on January 7. “With our view of Valens as an industry leader, we see them as an attractive take out target by larger cannabis companies looking to acquire industry-leading extraction and laboratory testing capabilities.”

Kideckel is calling for 2019 Adjusted EBITDA of $20.5 million on revenue of $43.5 million and 2020 Adjusted EBITDA of 68.6 million on a top line of $118.7 million.

“We are initiating coverage with an ‘Outperform’ rating, and a 12-18 month price target of $5.00, based on our discounted cash flow (DCF) valuation, using a 15 per cent discount rate and 3 per cent terminal growth rate,” says the analyst.

Kideckel’s $5.00 target represents a projected 12-month return of 184 per cent at the time of publication.