The Valens Company has a huge upside, says AltaCorp

The Valens Company (The Valens Company Stock Quote, Chart, News TSXV:VLNS) has earned a target raise from AltaCorp Capital analyst David M. Kideckel on the back of an earnings beat with its latest quarterly results.

In an update to clients Tuesday, Kideckel reviewed Valens’ fourth quarter results and reiterated his view that VLNS is one of his Top Picks for 2020.

Kelowna, BC-based cannabis extraction and white-label product company Valens reported its Q4 ended November 2019 results on Monday, posting revenue up 86 per cent sequentially to $30.6 million and above the high end of management’s guidance delivered in December. Adjusted EBITDA was $27.4 million for the fiscal year and $17.7 million for the fourth quarter compared to $9.8 million in the Q3 and representing a 57.7 per cent margin.

Reflecting on 2019, CEO Tyler Robson said that Valens added significant scale to its operations over the year, with its multi-year extraction contracts now positioning the company as “the partner of choice” in the cannabis space.

“In the second half of 2019, we broadened our offering to include white label product development and we now produce a broad portfolio of safe, consistent and innovative products to help our partners build brands and differentiate themselves in the market.

These white label product development initiatives contributed to record revenues in the fourth quarter of 2019 as new and existing customers pushed to roll out Cannabis 2.0 oil-based products into the market,” Robson said in a press release.

Valens’ $30.6 million top line was above the consensus estimate of $28.1 million and Kideckel’s $29.8-million estimate, while adjusted gross profit of $22.6 million was also better than the consensus $17.4 million and Kideckel’s $18.3 million.

The analyst likes the path that Valens has chosen regarding its white-label program, calling it crucial to the company’s long-term growth.

“Based on the progress made so far, we view Valens to be on the right track. Valens expects beverages from Iconic Brewing to be on the shelves over the next few weeks.

The Company has signed white label contracts with different partners, and according to management it is negotiating more than 50 different white label opportunities. We expect more white label contracts to materialize over the next few quarters as the market for cannabis derivatives evolves. Valens expects white label revenue to exceed tolling revenue by the end of FY2020e,” wrote Kideckel.

With the update, Kideckel has increased his revenue estimates due to better visibility while reducing his gross margin and EBITDA margin estimates to factor in a higher contribution to sales from the white label segment. The analyst is now calling for fiscal 2020 revenue and adjusted EBITDA of $185.8 million and $81.6 million, respectively, and 2021 revenue and adjusted EBITDA of $245.8 million and $107.5 million,
respectively.

As for valuation, Kideckel thinks Valens is looking attractive due to its strong growth and profitability outlook. He estimates the stock to be trading at an EV/Revenue and EV/EBITDA of 1.8x and 4.1x his 2021 estimates, respectively.

“We believe Valens’ current valuation is unjustified given the Company’s strong fundamentals and consistent execution. Key catalysts for Valens include better visibility over revenue growth from the white label segment and from international expansion plans,” wrote Kideckel.

The analyst has maintained his “Outperform” rating while bumping his target from $10.25 to $10.50, which at press time represented a projected 12-month return of 182 per cent.