The Valens Company keeps Outperform rating with ATB Capital

The stock has fallen hard over the past year but Frederico Gomes of ATB Capital Markets continues to see The Valens Company (The Valens Company Stock Quote, Chart, News, Analysts, Financials TSX:VLNS) as a strong growth-driver in the cannabis space. Gomes maintained an “Outperform” rating and $11.25/share target price for a projected return of 331 per cent in an update to clients on Monday.

Founded in 1981 in Kelowna, B.C. as Valens Groworks and now headquartered in Toronto, The Valens Company engages in the development and manufacturing of cannabinoid based products under Health Canada guidelines in the cannabis operations (extraction, post processing, and white label manufacturing under standard processing and cultivation licenses) and analytical testing segments.

Gomes provided his updated analysis after The Valens Company released its fourth quarter and 2021 year-end financial results, with Gomes noting the quarterly results to be mixed.

A bright spot for the company’s financial results was its adjusted gross profit, which came in at $6.3 million to beat the ATB Capital Markets projection of $4.1 million and the consensus estimate of $5.5 million, with the 34.1 per cent gross margin also beating the estimates of 21.7 per cent from ATB Capital Markets and 26.8 per cent as the consensus.

Gomes noted the beat to be driven by a full quarter of contribution from Green Roads, new branded business lines, manufacturing optimization and portfolio rationalization.

However, on the flip side, the company’s report of $18.4 million in net revenue came in below the ATB Capital Markets estimate of $19 million and the consensus projection of $20.5 million, with the 12.3 per cent sequential decrease being attributed to a 53.9 per cent decline in B2B sales, partially offset by a 31.7 per cent sequential increase in B2C sales in Canada as Valens executes its branded strategy, as well as a 21.3 per cent sequential increase in US CBD sales as Green Roads’ financials were consolidated for the full quarter.

Meanwhile, Valens’ adjusted EBITDA loss of $13.3 million in the quarter missed the $8.2 million loss target set by both ATB and the consensus, with Gomes attributing the miss to increased selling, general and administrative expenses from integrating its new acquisitions and listing on NASDAQ, supply-chain disruptions, and a lower contribution from the Canadian Emergency Wage Subsidy.

“This quarter showcases the progress we have made in our business plan in key areas despite a competitive and challenging operating environment in Canada and globally,” said Tyler Robson, Chief Executive Officer, Co-Founder and Chair of The Valens Company in a February 28 press release. “Net revenue slightly declined quarter-over-quarter as we completed the transition of our B2B business to align with the ‘fewer, bigger, better’ strategy and was negatively impacted by the floods in British Columbia which resulted in supply chain disruptions. However, in our two key revenue segments, we are very pleased with the industry leading growth in provincial sales revenue and the full quarter revenue generated by our Green Roads US CBD business. With the B2B transition largely behind us, we expect to have more sustained growth in 2022.”

In terms of capital, the company finished the quarter with $19.1 million in unrestricted cash and marketable securities, though Gomes estimates Valens’ cash burn from the last quarter to be around $16.2 million. With a new $40 million revolving loan facility and debt being repaid, Gomes estimates the company’s pro-forma cash to be around $46 million.

“We are wary of this cash burn level, but we expect that to narrow as the company cuts costs and drives towards adjusted EBITDA profitability,” Gomes said.

The Valens Company ended the 2021 fiscal year with $78.2 million in revenue, down 6.7 per cent from the $83.8 million the company reported in 2020. According to his February 7 analysis, Gomes projects the company’s revenue to move into nine figures in 2022 at a forecasted $128.2 million for a 63 per cent year-over-year increase, followed by a projected jump to $213.9 million in 2023 for a potential year-over-year increase of 67 per cent.

The company ended 2021 with an adjusted EBITDA loss of $26.7 million, with Gomes projecting the loss to drop to $13.5 million in 2022 before turning positive at $20.8 million in 2023 for a 10 per cent margin.

Valens also ended 2021 with a gross profit margin of 22.1 per cent, which Gomes projects to expand to 28 per cent in 2022 and 36 per cent in 2023.

“We believe that Valens will accelerate growth in FY2022e, especially in the B2C and Green Roads segments. Management also anticipates to improve its operating performance in FY2022e through the strategic initiatives presented in the Company’s [February 7] Investor Day. We are encouraged by the Company’simprovement in adj. gross margin this quarter and continued market share growth in Canada, which we believe are supportive of our thesis,” Gomes said.

“We view Q4/FY21 and Q1/FY22e as transitional, and we expect Valens to accelerate growth from Q2/FY22e driven by new provincial listings and market share gains in the Canadian recreational cannabis market,” he wrote.

Overall, The Valens Company’s stock price has dropped by 55.1 per cent over the last 12 months, with a 24.7 per cent loss since the start of 2022. After hitting a 52-week high of $12/share on May 10, the stock’s price has dropped most of the time since then, going as low as $2.11/share on January 27.