Raymond James analyst Rahul Sarugaser has softened his stance on The Valens Company (The Valens Company Stock Quote, Chart, News, Analysts, Financials TSX:VLNS), as he maintained his “Market Perform 3” rating, but lowered his target price to $3.00/share from $3.50/share for a 1.7 per cent potential return in a September 3 update to clients.
Founded in 1981 and headquartered in Kelowna, B.C., The Valens Company is a multi-licensed, vertically-integrated cannabis company specializing in the extraction, commercialization and white-labelling of cannabinoid-based consumer products.
Sarugaser’s latest analysis comes after The Valens Company announced an agreement to purchase B.C.-based craft cannabis producer Citizen Stash for approximately $54.3 million in shares, signalling a potential pivot from white-labelling to competition.
In conversations with current and potential contract manufacturing customers, Sarugaser believes Valens may be making a mistake with its strategic pivot by going into competition with the same businesses it supplies.
“We found consensus among these operators that VLNS’s acquisition of CSC causes them to be less likely to employ VLNS for third-party manufacturing, for fear that their unique/rare genetics and intellectual property could be at risk in competitors’ hands,” he said.
In the press release announcing the acquisition, Valens management noted the agreement could provide an opportunity to strategically expand into premium flower categories, achieve meaningful revenue and cost synergies, while the company’s asset-light, flexible approach could become a potentially valuable asset to leverage en route to entry into the US market upon federal legalization.
“We are excited to join forces with Citizen Stash’s experienced team and broaden our offerings in the flower and pre-roll verticals with a best-in-class brand,” Tyler Robson, CEO and Chair of the Board of The Valens Company, said in the company’s August 31 release. “The premium price tier of the flower and pre-roll segments represents the best expansion opportunity for Valens in the flower category, as premium brands are the hardest to build, while also capturing the highest margins. Citizen Stash’s asset light model, and proprietary genetics will provide us significant operational flexibility and an opportunity to leverage the growing capabilities of our existing LP partners.”
“In short, this strategic acquisition will allow Valens to significantly expand its presence in the recreational market and capture a share of the largest categories of the Canadian cannabis space without the burden of a high-cost growing infrastructure. We are opportunistically expanding our product offering to align with consumer demand for high quality craft cannabis flower and pre-rolls,” Robson added.
In addition to the proposed Citizen Stash acquisition, Valens has since announced the acquisition of Verse, a cannabis brand with a wide-ranging portfolio spanning all major product categories, as well as entering into a white label partnership with Fire and Flower, a technology-powered, cannabis retailer with over 90 corporate-owned stores in Alberta, British Columbia, Manitoba, Ontario, Saskatchewan, and Yukon Territory.
The proposed Citizen Stash transaction has prompted revisions to Sarugaser’s financial metrics, lowering his revenue target for the third quarter to $30 million from his initial estimate of $45 million, while his final quarter estimate is now $31 million instead of $52 million, with projections also down approximately 50 per cent in each quarter of 2022.
From an annual perspective, Sarugaser has cut his projection to $100 million from his initial estimate of $141 million, though it still represents a potential year-over-year increase of 19 per cent. Sarugaser’s 2022 revenue estimate is now set at $174 million, just over half his previous projection of $338 million while remaining in place for a 74 per cent potential year-over-year increase.
As a result, Sarugaser’s EV/Revenue multiple estimates have risen slightly, with 2020’s figure now revised to 6.4x from 6.2x, 2021 projected to be 5.4x instead of 3.7x, and 2022 now forecast to be 3.1x instead of 1.5x.
Sarugaser has also revised his EBITDA estimates, as he expects a $16 million loss for 2021 compared to the initial $18 million loss projection, while his projection for 2022 is now a $3 million loss instead of a $13 million loss.
“Following VLNS’s 4Q20 earnings, we highlighted our disagreement with VLNS’s plans to step away from its area of key competitive advantage: its prowess as a third-party manufacturer, and step toward a business in which it has little or no advantage: marketing branded products beside large, experienced competitors,” Sarugaser said. “Importantly, we identified that this strategy would begin to put VLNS in direct competition with its own processing/white-labelling customers. Competing with your customers is not a good idea (if you intend to keep that business), in our view.”
Overall, The Valens Company’s stock price has risen by 51.5 per cent for the year to date, reaching a high point of $4.00/share on May 10.