Cannabis extraction company Valens GroWorks (Valens GroWorks Stock Quote, Chart News TSXV:VGW) is establishing itself as a major player in the cannabis industry, according to GMP Securities analyst Ryan Macdonell, who on Tuesday delivered a flash update to clients on Valens’ just-released third quarter guidance.
Kelowna-based Valens on Tuesday announced new revenue projections for its Q3, finished in August. Management says the company expects its revenue to come in between $16 million and $17 million and that it should process over 26 tonnes of cannabis and hemp biomass in the third quarter, up more than three times the 8.5 tonnes in its second quarter. The volume implies a strong, ongoing uptick, with over 50 per cent of the Q3 volume being processed in the month of August. Altogether, Valens boasts 425,000 kg of extraction capacity, the largest in the country.
“We continue to see a significant ramp up in volumes month over month with August seeing almost 50 per cent of the volumes in the third quarter. That pace has continued to accelerate into September as we look to fill our existing capacity on a run-rate basis in the next six months,” said Valens president Jeffrey Fallows in a press release.
Macdonell says the company’s revenue guidance is above his $16.6 million forecast as well as the consensus estimate of $15.6 million. The analyst says that volume was better than expected as hemp likely accounted for a larger proportion of total volume, while he figures that Valens’ average selling price was about $0.63 per gram over the quarter, below his projection of $0.79 per gram. Macdonell says that the more than threefold increase in volume processed likely led to scale benefits and margin expansion over the Q3, where the company notched 58 per cent gross margin and 23 per cent EBITDA margin over the second quarter.
Macdonell says Valens is an under appreciated stock compared to its peers, with the company having one of the lowest valuations in the cannabis space.
“At a mere 4.7x our CY20 EBITDA forecast, Valens holds one of the lowest multiples in our coverage universe compared to an average of 7x for the extractors and 13x for the traditional LPs,” writes Macdonell.
“Our $10.00 target is based on a 15x multiple on our CY20 EBITDA estimate. In our view, Valens deserves such a multiple given the company’s strong growth prospects as it ramps up tolling and white labeling services, and its significant readiness for the upcoming extract products market,” he writes.
Macdonell’s $10.00 target comes with a “Buy” rating and represents a projected 12-month return of 175.5 per cent at the time of publication.
Valens’ share price has trailed off in recent months along with the rest of the marijuana space, yet the stock currently remains up 142 per cent year-to-date. VGW is up over five per cent in late-day trading on Tuesday.
Valens, which is a vertically-integrated cannabis company that has white label product development along with its extraction services, announced last month that it had been added to NYSE-listed ETF, The Cannabis ETF, which tracks the Innovation Labs Cannabis Index and includes a portfolio of 36 stocks expected to benefit from growth in the legal marijuana, CBD and hemp markets.