Looking for a cannabis stock that is cheap compared to its peers? The Valens Company (The Valens Company Stock Quote, Chart, News TSXV:VLNS) fits the bill says M Partners analyst Paul Piotrowski.
In a research report to clients Tuesday, Pitrowski initiated coverage of The Valens Company with a “Buy” rating and one-year price target of $7.80, which implied a return of 107 per cent at the time of publication.
“Valens currently trades at a discount to its peers despite its defensible, high-margin, FCF-generating business model,” the analyst wrote. “We believe Valens is uniquely positioned to succeed in Cannabis 2.0 and to continue to generate cash flow and return capital to shareholders.”
Pitrowski noted that Valens has multiple extraction and white label agreements already in place, which he says provide clear revenue and visibility for 2020.
“With 11 extraction and 11 white label agreements comprising over 240,000 kg in contracted demand, near term forecasts are de-risked,” he said. “Contracted demand is recurring and diversified, with a customer base that includes Shoppers Drug Mart, Iconic Brewing Co., BRNT Ltd. and several large-cap LPs. Even under the assumption that VLNS’s entire contracted demand is for pure toll extraction services, the Company is set for ~$144M in revenue in 2020 ($0.60 per gram tolling fee). Though as volumes have been shifting to higher revenue white label services, we anticipate a top-line of $160.8M in 2020.”
The analyst said VLNS is one of the few profitable cannabis companies and runs a very high margin business. He added that the company is differentiated from its peer in both extraction and white label product formulation expertise.
“Valens is the only largescale extraction company in Canada that can facilitate five different extraction methods (competitors typically only offer one or two methods),” he said. “Its ISO 17025 accredited testing lab and partnership with Thermo Fisher Scientific (TMO-NYSE) further differentiate VLNS on product quality. Valens also has exclusive rights in certain markets to use SōRSE emulsion solutions in the development of ingestible products.
Pitrowski thinks The Valens Company will post Adjusted EBITDA of $23.1-million on revenue of $56.2-million in fiscal 2019. He expects those numbers will improve to EBITDA of $68.2-million on a topline of $160.8-million the following year.
“Valens continues to trade at a discount to its peers, while in our view being the best equipped to succeed in Cannabis 2.0,” the analyst concluded. “Valens trades at 6.2x 2020 EBITDA vs. peers at 16.5x 2020 EBITDA. We believe the discount is unwarranted as Valens has consistently reported strong revenue growth and margins and is the only cannabis company in Canada generating free cash flow. As Valens continues to report strong quarters, shares should rerate closer to its peers.”