Tuesday, January 21, 2020 12:17:06 PM
Valens Groworks Corp. (VLNS-X) is “built to lead Cannabis 2.0,” according to M Partners analyst Paul Piotrowski. He initiated coverage of the Kelowna-based cannabinoid company with a “buy” rating. “Valens has several extraction and white label agreements in place, providing clear revenue and cash flow visibility for 2020," he said. "With 11 extraction and 11 white label agreements comprising over 240,000 kg in contracted demand, near term forecasts are de-risked. Contracted demand is recurring and diversified, with a customer base that includes Shoppers Drug Mart, Iconic Brewing Co., BRNT Ltd. and several large-cap LPs. Even under the assumption that VLNS’s entire contracted demand is for pure toll extraction services, the Company is set for $144-million in revenue in 2020 ($0.60 per gram tolling fee). Though as volumes have been shifting to higher revenue white label services, we anticipate a top-line of $160.8M in 2020. “VLNS runs a very high margin business model and is one of the few profitable cannabis companies. Valens generated gross margin of 38 per cent in Q1/19, 58 per cent in Q2/19 and 78per cent in Q3/19. Last quarter, the Company posted a 59-per-cent EBITDA margin, net income of $5.9-million and FCF of $3.0-million. Toll extraction services currently remain a high margin business and while margin compression is anticipated, VLNS’s transition towards the more defensible white labeling is well underway.” Mr. Piotrowski target of $7.80. The average on the Street is $8.56. “Valens continues to trade at a discount to its peers, while in our view being the best equipped to succeed in Cannabis 2.0,” the analyst said. “Valens trades at 6.2 times 2020 EBITDA vs. peers at 16.5 times 2020 EBITDA. We believe the discount is unwarranted as Valens has consistently reported strong revenue growth and margins and is the only cannabis company in Canada generating free cash flow. As Valens continues to report strong quarters, shares should rerate closer to its peers.”
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