The Valens Company is good for a triple, says Haywood

Haywood Capital Markets analyst Neal Gilmer has again altered his view of The Valens Company (The Valens Company Stock Quote, Chart, News, Analysts, Financials TSX:VLNS), lowering his target price from $5.25/share to $4.75/share while maintaining a “Buy” rating in an update to clients on Monday.

The Kelowna, B.C.-based outfit 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 comes after The Valens Company reported financial results for the first quarter of its 2022 fiscal year, which Gilmer indicated to have some hits and misses while also noting the target drop came from a 2.6x EV/Revenue multiple being applied to newly-introduced 2023 estimates, followed by a 15 per cent discount.

The company’s financial report was headlined by $23.2 million in revenue, which represented a 26 per cent sequential increase while coming out slightly ahead of the $22.2 estimate from Haywood Capital, as well as the $21 million estimate put forth by the consensus.

Valens benefited from significant jumps in provincial sales with a 36.7 per cent sequential increase to $10.8 million, as well as seeing B2B sales shoot up by 53.1 per cent sequentially to $6.3 million, though it was slightly offset by a 10.5 per cent sequential drop from its Green Roads acquisition, which yielded $5.1 million in revenue for the quarter.

The company also reported softer margins than expected, with the reported $3.4 million in gross profit with a 14.6 per cent margin missing in relation to the consensus expectation of $6.1 million in gross profit with a 29 per cent margin, as well as missing the Haywood Capital projection of $6.6 million in gross profit and a 29.8 per cent margin.

Subsequently, the company’s adjusted EBITDA was also a slight miss, with the reported $17.6 million loss coming in below the $14.9 million loss expected by Haywood Capital, as well as the $15.5 million loss expectation set out by the consensus.

“The results from the first quarter demonstrate that Valens’ underlying business has passed an inflection point. Valens delivered strong top line growth despite many headwinds in the marketplace,” said Tyler Robson, Chief Executive Officer of The Valens Company in an April 18 press release. “This performance reinforces the importance of Valens now diversified business lines across provincial sales, B2B LP sales, and Green Roads sales.”

“Overall, our business remains on track to deliver on our objectives in 2022, and we reiterate our target to achieve positive adjusted EBITDA in Q4 2022,” Robson added.

The new financial figures resulted in minimal changes to Gilmer’s topline projections for the company going forward, slightly raising his 2022 revenue target from $122.8 million to $123.2 million for projected year-over-year growth of 57.5 per cent, then reducing his 2023 target from $196.2 million to $195.1 million for projected year-over-year growth of 58.4 per cent.

From a valuation perspective, Gilmer forecasts the company’s EV/Revenue multiple to drop from the reported 1.7x in 2021 to 1.1x in 2022, then to a projected 0.7x in 2023.

The biggest changes to Gilmer’s forecasts come in the margins, as he lowered his adjusted gross profit target from 2022 from $43.1 million and a 35.1 per cent margin to $32.1 million and a 26.1 per cent margin. Looking ahead to 2023, Gilmer forecasts a more minimal reduction from $77.3 million and a 39.4 per cent margin to $76.6 million and a 39.3 per cent margin.

Subsequently, Gilmer’s adjusted EBITDA projections also dipped, as he now forecasts a $40.9 million loss in 2022 (previously a $29.4 million loss projection) before expecting a positive turn in 2023 at $16.6 million for a margin of 8.5 per cent.

Despite the changes, Gilmer continues to see value in Valens, pointing to initial exposure to the U.S. market from its Green Roads acquisition in mid-2021 as a catalyst, along with a diversified product offering after closing on Canadian operation Citizen Stash, as well as entering into an exclusive partnership with Epsilon Healthcare Limited to further its international expansion while also getting the company into a facility in Australia to facilitate expansion into more global markets.

“Valens trades at a noticeable discount to other Canadian cannabis companies on a forward sales multiple,” Gilmer said. “With the potential catalysts going forward into fiscal 2022 we believe this spread should narrow as management demonstrates execution on its objectives.” 

The Valens Company’s stock value has been slashed by 54.1 per cent since the start of 2022 alone, unable to sustain momentum after hitting $3.60/share on February 10, with its value dropping nearly 50 per cent since March 29. At the time of publication, Gilmer’s new target of $4.75 per share represented a projected one-year return of 208 per cent.