The Valens Company Inc

The Valens Company Inc (TSX: VLNS) is a Canada-based manufacturer of cannabis derivative products. The Company provides cannabis processing services across five core technologies, in addition to product development, formulation and manufacturing of cannabis consumer packaged goods.

Key Highlights

• Entered into manufacturing Partnership with MTL Cannabis: The Valens Company enters manufacturing Partnership with MTL Cannabis for extraction and manufacturing of Pre-rolls and Vapes. The company expects the contract to begin at the end of the first quarter of fiscal 2022.
  

• Strategic agreements with PMI Mexico: Recently Valens Company a leading manufacturer of cannabis products, announced today two agreements with PM I Mexico, a subsidiary of Merger Group, one of the main drug suppliers of the Mexican government. Under the first agreement, Valens will supply CBD for PMI's ongoing pharmacokinetic (PK) stage medical trials, which are focused on anti-inflammatory applications of medical-grade, nano-water emulsified CBD oil. The clinical trial, which is set to begin once Valens shipments arrive in Q1 of 2022, will be conducted across private hospitals in Mexico. At the conclusion of the trial, Valens will be the sole manufacturer and global distributor in collaboration with PMI. Under the second agreement, Valens will manufacture and distribute CBD-infused and uninfused Predilife Ⓡ products globally while PMI will be responsible for distribution of the Predilife Ⓡ products in Mexico.
  

• Optimism Over U.S. Legalization: Optimistic types also are pointing to growing numbers of U.S. states that continue to march toward legalization. About eight – possibly even nine – states will hold referendums on legalization of marijuana in 2022. Most, if not all, will likely see the legal restrictions dropped. As well, the probability of federal legalization will take a giant step forward.             

Financial Highlights: Q3FY21

Source: Company filing

• During the third quarter ended on August 31, 2021, the company’s net revenue increased by CAD 2,862 or 15.8% to CAD 20,990, compared to revenues of CAD 18,128 reported in the same period in fiscal 2020. The increase in net revenue was mainly driven by the contribution of Green Roads and LYF, as the companies were acquired in the third and second quarter of 2021 respectively
• Gross profit decreased to CAD 5,629 in Q3FY21, compared to CAD 7,313 in Q3FY20. Gross profit was negatively impacted in Q3FY21 because of the Company’s continued execution of the shift away from the historical focus on toll processing to the current strategic focus on product development and manufacturing.
• Loss from operations expanded in Q3FY21 to CAD 12,799 vs CAD 3,064 in Q3FY20, mainly because of steep surge in the operating expenses.
• Comprehensive losses increased to CAD 11,136 compared to CAD 3,064 reported in the same period of the previous financial year.

Risk Associated: The company is exposed to variety of risks ranging from regulatory risk, supply chain related risk, lower demand offtake for cannabis recreational products, forex risk and other macroeconomic risk.

Valuation methodology (illustrative): Price to Sales-based valuation

Stock Recommendation

The Company continues to remain one of the largest cannabis extraction and custom manufacturing companies in Canada. In the third quarter of 2021, the Company continued to successfully execute on the shift in focus away from third party toll extraction processing to the formulation, manufacturing and launching of product SKUs into the cannabis 2.0 market for their industry partners. Also, the company reported decent topline growth on QoQ and YoY as well in the Q3FY21. Also, the recent agreements are going to move well for the company in the upcoming quarter and also reflects strength of the company’s business model. However, the company is exposed to the risks highlighted in the risk section. Hence, we recommend a “Speculative Buy” rating on “VLNS” stock at the closing price of CAD 3.54 (as on December 23, 2021).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.  

Technical Analysis Summary:

1-Year price chart (as on December 23, 2021). Source: REFINITIV, Analysis by Kalkine Group.

*The reference data in this report has been partly sourced from REFINITIV.

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