Valens GroWorks stock is very undervalued, GMP says

The pipeline of opportunities is plentiful for cannabis extraction company Valens GroWorks (Valens GroWorks Stock Quote, Chart, News TSXV:VGW), says GMP Securities analyst Ryan Macdonell, who in a Thursday note to clients reported on the company’s just-announced white label beverage deal.

Kelowna, BC-based Valens released a statement on Thursday saying that the company has entered into a binding five-year white label agreement for cannabis-infused beverages with Iconic Brewing, a private beverage alcohol company. Iconic Brewing is headquartered in Toronto and currently has beverage alcohol distribution in Ontario, Manitoba, Saskatchewan, Nova Scotia, New Brunswick, Alberta and BC, with its focus on ‘better for you’ beverages in the cider and ready-to-drink categories.

The terms of the deal will call for production of a minimum of 2.5 million cannabis-infused beverages over five years, with the opportunity to expand the partnership into new product offerings. Valens will provide the purified extract input as well as formulation services and the Sorse emulsion IP (for which Valens has exclusive licensing in Canada), while Iconic will do the branding and marketing.

Valens Groworks stock keeps “Buy” rating and $10.00 per share target price at GMP…

“We are thrilled to partner with Iconic Brewing, one of the fastest growing alcohol beverage companies in eastern Canada, to help create their new line of cannabis-infused beverages,” said Tyler Robson, CEO of Valens. “Their ability to formulate and forecast trends is second to none, as demonstrated by the success of their current beverage products including Cottage Springs Vodka Soda, Picnic Wine Co, Liberty Village, and Cabana Coast.”

Macdonell says that cannabis-infused beverages could be one of the highest margin product categories in the so-called Cannabis 2.0. The analyst thinks the new agreement could represent $8.75 million in total sales and between $1 and $1.5 million in revenue for Valens.

“Assuming an average selling price into the provincial REC markets of $3.50 per beverage, we estimate that the minimum volume of the five-year white label agreement could represent $8.75 million of total sales. We expect Valens could garner 60-80 per cent of the sales through revenue-sharing in the white label contract, potentially supporting ~$1.0 million – $1.5 million of annual revenue for VGW,” Macdonell writes.

Valens has a pretty good pipeline of opportunities ahead of it, says Macdonell.

“According to the company’s publicly-available investor presentation, VGW is currently negotiating over 50 white label opportunities. We anticipate that some of these agreements could potentially be in the late-stage of negotiations. As the launch of cannabis 2.0 approaches, we expect we could see more announcements of white labeling contracts from Valens,” the analyst writes.

Macdonell is maintaining his “Buy” rating and $10.00 per share target price, which represents a projected return of 172.5 per cent at the time of publication.

Valens’ share price has been on a downward trend for the past five months, along with the cannabis space as a whole, but the stock remains up 130 per cent year-to-date.

Last week, Valens announced new projections for its third quarter, with management now calling for revenue between $16 and $17 million, with the company processing over 26 tonnes of cannabis and hemp biomass. The processing volume is up more than three times the 8.5 tonnes of Valens’ second quarter.