ATB Capital remains bullish on The Valens Company

Cannabis derivatives company The Valens Company (The Valens Company Stock Quote, Chart, News, Analysts, Financials TSX:VLNS) doubled its share price between March and mid-May, and while the stock has come off a bit more recently it’s still a Top Pick in the cannabis sector, according to ATB Capital Markets analyst David Kideckel. In an update to clients on Monday, Kideckel maintained his “Outperform” rating and 12-month target of $4.50, saying the company’s catalyst-rich road ahead should start shrinking the big valuation gap between VLNS and its Canadian and US cannabis peers.

Kelowna, BC-based extraction company The Valens Company manufactures cannabis derivatives and has proprietary cannabis processing services for the medical, therapeutic, health and wellness and recreational segments, with its products on offer in oils, vapes, concentrates, edibles and topicals, while earlier this month, Valens entered the pre-roll and flower categories, as well, through a partnership with Verse Cannabis.

Also earlier in June, Valens closed on a previously announced financing round involving about 13.9 million units at $3.30 per unit for gross proceeds of about $46 million. The company said $28 million of the net proceeds will go towards M&A and business expansion opportunities, with $5 million for capital expenditures and the balance for working capital and other general operating expenses.

Ahead of Valens’ second quarter earnings due on July 14, Kideckel is calling for revenue to be flat sequentially at $20.4 million (compared to $20.0 million for the Q1 2021) and the adjusted EBITDA loss to grow from $2.2 million to $3.5 million. The analyst said Valens should outperform most of its peers over the second quarter, even as sales are likely to be flat while other companies reported declining Q2 sales. (All figures in Canadian dollars except where noted otherwise.)

But Kideckel sees growth to accelerate over the back half of the year due to the post-pandemic reopening of retail stores, especially related to Cannabis 2.0 product sales in Valens’ wheelhouse, to the on-boarding of Valens’ latest acquisition in US CBD company Green Roads and to Valens’ expanding of its distribution in Canada and increased sales volumes from recently-launched Cannabis 1.0 and 2.0 products.

“Given the headwinds impacting the overall industry, our channel checks with industry players, the recently reported results by other Canadian cannabis companies — several of them with declining q/q sales — and Valens’ quarter ending before the easing of COVID-19 restrictions (stores remained closed through May, especially in Ontario), we are updating our expectations to reflect muted sales growth from Q1/FY21 to Q2/FY21, while maintaining our view of growth accelerating from H2/FY21 onwards,” Kideckel wrote.

“Valens remains one of our top picks in the Canadian cannabis space supported by an attractive valuation and a catalyst-rich environment,” he said.

On the completed acquisition of Green Roads for US$40 million with a further potential US$20 million in earnouts, announced on Monday, Valens CEO Tyler Robson said it represents a “monumental step” in the company’s international expansion strategy and fits with the company’s vision to be a global cannabis CPG business.

“The combination of Valens and Green Roads makes for an unbeatable team, diversified distribution network, and unparalleled product development and manufacturing platform, which we expect will provide us the footprint to become one of the biggest players in the global cannabis health and wellness market. Stay tuned for updates on anticipated synergies as we move forward as a stronger, combined company,” Robson said in a press release.

Kideckel’s comments on the acquisition were a little more muted, saying while the move increases Valens’ addressable CBD market and positions it well for a rapid move into the US cannabis market if and when the substance becomes federally legal, he is maintaining a cautious view on the incremental contribution of Green Roads, due to the highly fragmented, competitive and regulated nature of the the US CBD market

“We factor additional sales from Green Roads starting only in Q1/FY22e. Therefore, we believe there could be significant upside to our estimates, as reflected in our bull case scenario,” Kideckel said.

On the whole, the analyst is now calling for Valens to generate fiscal 2021 and 2022 (fiscal year end November 30) revenue of $97.8 million and $220.4 million, respectively, and 2021 and 2022 adjusted EBITDA of negative $1.3 million and $42.1 million, respectively.

At press time, Kideckel’s $4.50 target represented a projected one-year return of 42 per cent.

“We estimate that Valens is trading at a FY2022e EV/Sales of 2.5x, a discount of up to 75 per cent against Canadian and US MSOs large-cap and mid-cap peers. We believe that this discount is poised to close as catalysts materialize, such as Valens’ Nasdaq listing, the successful integration and realization of synergies from Green Roads and continued sales growth in Canada,” Kideckel wrote.