Valens GroWorks has a 125 per cent upside, says GMP Securities

GMP Securities analyst Martin Landry says strong growth prospects from cannabis play Valens GroWorks (Valens GroWorks Stock Quote, Chart CSE:VGW) are cause for a target upgrade on the stock. In an equity research update to clients on Friday, Landry raised his target price from $8.00 to $10.00 while maintaining his “Buy” recommendation.

Kelowna, BC-based Valens on Wednesday reported its first quarter fiscal 2019 financials, coming in with record revenue of $2.2 million, a big jump over zero revenue this time last year. CEO Tyler Robson called the quarter a key inflection point for the company.

“We continue to execute our strategic business plans to lead the industry in extraction, post processing and white label product development,” Robson said in a press release. “This plan includes further increases to our extraction capacity at the Kelowna facility and building out the recently acquired adjacent property to add additional capacity. We expect Valens’ position as the world’s leading production partner to the cannabis industry to strengthen, accelerate and grow in both the near and long-term.”

Landry says that while the Q1 results were in line with expectations, they are largely immaterial in relation to the company’s earnings power.

“With many capabilities in-house to produce a wide variety of cannabis extract products, Valens is an ideal partner for potential international CPG companies seeking to source and commercialize a cannabis derived product in Canada,” says Landry.

“In our view, partnerships and international expansion are potential catalysts which could cause VGW shares to re-rate higher,” he says.

Landry notes that with a nine-company-long client list for its product, five of which are among the top ten largest Canadian LPs, Valen’s 240-tonne capacity is now almost fully spoken for. The analyst also notes Valen’s LOIs with a number of international companies to develop and produce cannabis product abroad, with none of these potential international revenues currently included in his forecasts.

Landry is calling for 2019 revenue and EBITDA of $51.2 million and $13.2 million, respectively, (formerly $51.3 million and $18.6 million, respectively) and 2020 revenue and EBITDA of $181.0 million and $77.3 million, respectively (was $137.3 million and $63.1 million, respectively).

“We derive our $10.00 target price using a 15x multiple applied to our CY20 EBITDA estimate. In our view, Valens deserves such a multiple given the company’s strong growth prospects, high profitability levels and significant readiness for the upcoming extract
products market,” says Landry.

The analyst’s $10.00 target represented a projected return of 125.2 per cent at the time of publication.