The Valens Company Inc. (TSX: VLNS) is a global leader in the end-to-end development and manufacturing of innovative, cannabinoid-based products. The Company operates as a partner of choice for leading Canadian and international cannabis brands by providing premium, proprietary services including CO2, ethanol, hydrocarbon, solvent-less and terpene extraction, analytical testing, formulation and product development and custom manufacturing.

Key Highlights:

• Recently, the Company informed that had received Cannabis Research Licence under Health Canada's Cannabis Act and Cannabis Regulations. The licence allows it to conduct research involving the administration or distribution of cannabis to human subjects for the assessment of taste, sight, smell or touch, subject to conditions laid out by Health Canada. The group will conduct controlled human trials for the sensory evaluation of its cannabis extracts, concentrates and oils, including vaporizers, and beverage and edible products, at its extraction, manufacturing and testing facilities in Kelowna, BC.
• Recently, the group announced the rollout of various new products as part of a custom manufacturing agreement with Verse Cannabis, a group of innovators focused on bringing to market cutting-edge product formulations rooted in cannabinoid science. These products are focused on bringing premium quality offerings to Canadian consumers at affordable prices.

Q2FY20 Financial Highlights: VLNS announced its quarterly results, wherein the company posted revenue of CAD 17.627 million, increased from CAD 8.8 million recorded in the previous corresponding period (pcp). The quarter was marked by higher production levels of 36 SKUs, as compared to 9 SKUs in the previous quarter. Gross profit stood at CAD 6.318 million, against CAD 5.09 million in Q2FY19. Adjusted EBITDA stood at CAD 2.699 million as compared to CAD 2.023 million in pcp. Net loss reduced to CAD 3.528 million from CAD 10.530 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Products are new to the consumers and may not receive the acceptability from the consumer or might not meet the consumer requirement. Further, any regulatory changes related to cannabis would hamper the company’s operations.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock plunged ~36% so far this year amid heightened volatility in the global equity market. The company received approval under Health Canada's Cannabis Act., which would provide a license to conduct controlled human trials for the sensory evaluation. With this research licence, the group is now able to perform sensory assessments at the product development stage to determine the quality and marketability of the products to maximize potential launch success. The above evaluation methodology would increase the company's custom manufacturing and white label services with the added ability to assess the palatability of bespoke cannabis blends formulated with Valens' extensive terpene database. Further, the company plans to continue to leverage attractive biomass pricing to increase margins in its custom manufacturing and white label segments in 2021. During the second half of fiscal 2020, VLNS would be focusing on demonstrating the value of Valens' platform as it integrates into the supply chain of leading companies looking to bring customized, innovative products to Canadian consumers. We have valued the stock using EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like OrganiGram Holdings Inc, Hexo Corp etc. Hence, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 2.21 on August 26, 2020.

VLNS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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