The Valens Company has a huge upside, according to ATB Capital

ATB Capital Markets analyst Frederico Gomes has re-established his bullish stance on The Valens Company (The Valens Company Stock Quote, Chart, News, Analysts, Financials TSX:VLNS), having been taken off restriction and issuing on Tuesday an “Outperform” rating with a one-year target of $9.50/share on the stock.

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’ updated analysis comes after the company announced it had secured bought deal equity financing valued at $32.3 million, which came from the sale of 12.2 million units at $2.65 per unit, with each unit consisting of one common share and a half warrant exercisable at $3.20/share, with a four year window to exercise it.

Gomes believes the infusion of cash will help the company address its free cash flow, which produced a $16.2 million burn last quarter.

“With the closing of the $32.3 million bought deal financing, we believe the Company has sufficient funds to execute its strategy and bridge to adj. EBITDA profitability, which we expect will happen in Q4/FY22e,” Gomes said.

In a letter to shareholders, Valens management explained the financing was necessary to cover higher-than-anticipated working capital to cover cash cycles from its cannabis 1.0 asset-light strategy, capital bridge necessary while integration initiatives are realized, and investments to internalize its manufacturing efforts at Green Roads (especially targeted at edibles), as well as to potentially acquire discounted assets in Canada and the United States.

The letter also referenced the monetization of non-core assets; Valens expects to generate $5-10 million in cash through the sale of Citizen Stash’s facility in British Columbia and other non-core assets.

Gomes’ forecast for the company remains relatively unchanged from his earlier estimation, as he projects the company’s revenue to move into nine figures in 2022 at a forecasted $124.6 million for a 59 per cent year-over-year increase, followed by a projected jump to $205.4 million in 2023 for a potential year-over-year increase of 65 per cent.

Meanwhile, after ending 2021 with an adjusted EBITDA loss of $26.7 million, Gomes forecasts the hole to get a bit deeper in 2022 for Valens at a $31.9 million loss before turning positive at a projected $20.3 million in 2023 for a ten per cent margin.

After ending 2021 with a gross profit margin of 22.1 per cent, Gomes projects that margin to expand to 31 per cent in 2022 ($38.4 million in gross profit) and 37 per cent in 2023 ($76.8 million in gross profit). At press time, Gomes’ $9.50 target represented a projected one-year return of 395 per cent.

The Valens Company has seen its share price fall by 79.3 per cent over the last 12 months, and 45.3 per cent since the start of 2022. After reaching $12/share on May 10, the company closed Wednesday at a 52-week low of $1.75/share.