The Valens Company is trading at a big discount, says Haywood

Neal Gilmer of Haywood Capital Markets has dropped back on The Valens Company (The Valens Company Stock Quote, Chart, News, Analysts, Financials TSX:VLNS), slashing his target price from $12/share to $7.50/share in an update to clients on Tuesday.

Kelowna, B.C.-based Valens operates as a cannabis product manufacturing company and has signed a variety of extraction and product development agreements with various Canadian licensed producers and CPG companies.

Gilmer’s updated analysis arrives after The Valens Company’s management team hosted an investor day for analysts, institutions, retail investors to discuss its 2022 corporate initiatives and to provide a deeper understanding into its operations. Gilmer said his target reduction is due to both his updated modelling and multiple compression in the cannabis space.

“Valens is taking steps to re-engage investors and to increase awareness of the business they are building, and its discounted valuation to the peer group,” Gilmer said.

Gilmer says Valens has completed a pivot from extraction services toward creating its own products, with the result being growth for its product sales at the provincial level.

The company has worked to get into new markets, with its initial exposure to the U.S. market coming through its completed acquisition of tincture and topical manufacturer Green Roads, while also diversifying its Canadian offerings through its acquisition of Citizen Stash, whose asset-light model has helped Valens get more exposure in the Canadian flower and pre-roll market, with more entries potentially on the horizon.

“The potential entry into the Quebec recreational cannabis market presents a significant growth opportunity for the Company as well as the expansion of over-the-counter CBD products in the United States by way of the Green Roads acquisition,” Gilmer said. “Valens continues to gain investor appreciation and bring awareness to its attractive valuation.”

Gilmer said The Valens Company is working on an integration initiative, having identified $10 million in cost savings through operational process efficiency gains, reductions in manufacturing and sourcing costs, organizational realignment and realization of M&A synergies, which the company hopes to implement by the end of 2022.

According to a company press release, Valens has its focus set in four areas, as it looks to drive revenue growth through the Canadian recreational and U.S. health and wellness markets, and increasing its market share across its brand, with priority markets including flower, vape, pre-roll, edible and beverage offerings in the premium, accessible premium, and value segments.

In addition, Valens hopes to generate increased gross margins and positive EBITDA margins through revenue growth and cost reduction and efficiency initiatives, while also creating shareholder value through its overall operational performance.

“It’s a pivotal time for Valens after a very acquisitive 2021 that saw us accelerate our business plan from three years to one and create a leading cannabis consumer products company with an exciting portfolio of brands,” said Tyler Robson, Chief Executive Officer and Chairman of The Valens Company in the company’s February 2 release. “As we redirect our focus to realizing the full package of targeted benefits from these acquisitions, we are now capturing the first wave of synergies through operational and organizational changes that we believe will not only improve our efficiencies but also drive the business towards becoming EBITDA positive in fiscal Q4 2022.”

Gilmer projects a small revenue loss for 2021, dropping from the reported figure of $83.8 million in 2020 to a projected $79.3 million to wrap up 2021, forecasting a loss of 5.4 per cent from year-to-year. From there, Gilmer forecasts a jump into nine figures for 2022, with the $131 million projection implying a year-over-year increase of 65.2 per cent. Gilmer projects similar growth in 2023, with the $208.9 million projection suggesting a 59.5 per cent year-over-year increase.

In terms of valuation, Gilmer’s EV/Revenue multiple projection experiences a slight uptick from 1.6x in 2020 to 1.7x in 2021, but then gets back into order with a forecasted drop to 1x in 2022, then dropped to 0.6x in 2023.

Meanwhile, after forecasting losses of $20.7 million in 2021 and $8.6 million in 2022, Gilmer follows management guidance and has the company’s annual adjusted EBITDA turning positive in 2023 at approximately $700,000 for a minimal margin of 0.3 per cent. After measuring EV/EBITDA at 9.6x in 2020, Gilmer lists it as NMF for 2021 and 2022 before restoring a multiple projection of 5.5x in 2023.

Valens’ stock value has dropped by 60 per cent in the last 12 months, and 26.6 per cent since the calendar turned to 2022. January 27 saw the stock drop to a 52-week low of $2.11/share, a long way off its high for the same period, $12/share on May 10.

Looking ahead, Gilmer sees potential catalysts in Valens’ integration efforts and the introduction of innovative new products, in its full-year 2021 and fourth quarter results due this month and potential M&A opportunities.

“Valens trades at a noticeable discount to other Canadian cannabis companies both on a forward sales and EBITDA multiple. With the potential catalysts going forward into fiscal 2022 we believe this spread should narrow,” Gilmer wrote. With the update, Gilmer has reiterated his “Buy” rating, while his new $7.50 target represented a projected return of 221 per cent.