Stifel GMP has launched coverage of Canadian cannabis extraction company The Valens Company (The Valens Company Stock Quote, Chart, News TSX:VLNS), with Stifel analyst Andrew Partheniou opening coverage on Thursday with a “Buy” rating and $3.75 target price. Partheniou said Valens’ proven track record of execution and considerable runway up ahead, the company is positioned for sustainable profitability.
Kelowna, BC-based Valens was founded in 2012 and is one of the largest extractors and manufacturers in Canada, with a wide selection of extraction methods and cannabis 2.0 products. Valens has about 425 tonnes of biomass extraction capacity at its Kelowna facility and offers both tolling services for processing a customer’s biomass or the sale of bulk extracts to the wholesale market. Valens has a second facility in development for expansion into EU-GMP standards for its 2.0 products, with construction to be completed over the second half of 2020.
Partheniou figures the total addressable market for extract retail could reach about $2 billion by the end of 2021. Extracts currently represent about 24 per cent of overall industry sales but the segment is in the early innings, according to the analyst, who estimated penetration could reach about 45 per cent, which could more than triple Valens’ market from second quarter 2020 levels to about $2 billion by the end of 2021.
“VLNS stands out among its peers with its flexibility to produce every 2.0 product format available thereby maximizing its utility to brand partners/LPs. In addition, the company has a proven track-record of execution through launching the first cannabis beverage into the REC channel and a history of robust profitability,” Partheniou wrote.
As well, Partheniou pointed to the current glut of cannabis flower in Canada, which makes for a ripe opportunity for extractors like Valens —the analyst estimates there could be as much as 325 tonnes of dried flower oversupply currently sitting in LPs’ inventories, with potentially more stored away after this fall’s outdoor harvest. All told, this could make for a new $275 to $300 million in tolling revenue opportunity for Canadian extractors.
“With VLNS currently having products in the REC market spanning nearly every 2.0 product category, VLNS has established a strong start to its REC presence. In addition, we believe that as its edible manufacturing facility comes online, VLNS could further expand upon its already fulsome product portfolio,” Partheniou wrote.
On the numbers, Partheniou thinks Valens will generate revenue and EBITDA in fiscal 2020 (year end Nov 30) of $88.1 million and $20.0 million, respectively, and revenue and EBITDA in fiscal 2021 of $143.4 million and $37.1 million, respectively.
At press time, his $3.75 target represented a projected one-year return of 92.3 per cent. Year-to-date,
VLNS is currently down 45 per cent.
Valens last reported earnings on July 15 where its second quarter 2020 featured revenue of $17.6 million compared to $8.8 million a year earlier and adjusted EBITDA of $2.7 million or 15.3 per cent of revenue compared to $2.0 million or 23.0 per cent of revenue in Q2 2019.