Revenue headwinds for the cannabis sector have Raymond James analyst Rahul Sarugaser cutting his price target on The Valens Company (The Valens Company Stock Quote, Chart, News TSX:VLNS).
In a research update to clients Tuesday, Sarugaser lowered his rating on VLNS from “Outperform 2” to “Market Perform 3” a cut his price target from $4.00 to $3.50, implying a return of 57 per cent at the time of publication.
The analyst said he previously bullish take on Valens has been tamped down by an industry that seems to be having trouble gaining traction.
“In our analysis of The Valens Company’s (VLNS-TSX) 2Q20 earnings, we viewed the company’s prior 1Q20 as a local stand-out quarter and 2Q20 as a local minimum,” Sarugaser said. “We further prognosticated that VLNS should approach a revenue quantum similar to 1Q20 by 2Q-3Q21, posting steady upticks quarter-to-quarter until then. More recently, we have seen flat QoQ adult-use cannabis revenue from several of VLNS’ larger customers including, Canopy Growth (CGC-NYSE, not covered), Organigram (OGI-NASDAQ, MP3, $5.00 TP), Tilray (TLRY-NASDAQ, not covered); as well as other industry bellwethers such as Aphria (APHA-NASDAQ, not covered), and Cronos Group (CRON-NASDAQ, OP2, US$10.00 TP). Clearly, the cannabis sector is facing revenue headwinds—which we expect to directly impact VLNS—so we take this opportunity to update our estimates and valuation of VLNS.”
Sarugaser is now modeling EBITDA of $18-million on revenue of $89-million in fiscal 2020. The following year, the analyst expects EBITDA of $6-million on a topline of $83-million.