The Valens Company Inc

The Valens Company Inc (TSX: VLNS) is a developer and manufacturer of cannabinoid-based products, and the company uses extraction methods such as CO2, ethanol, hydrocarbon, solvent-less, and terpene extraction. Its products are tinctures, capsules, beverages, and vape cartridges, among others.

Recent Update:

On November 23, 2020, VLNS announced that it has received an amendment to its existing Health Canada standard processing license to allow operations to commence at its second manufacturing and processing facility in Kelowna, B.C.

Key Highlights

• Higher Demand: Cannabis-based products have witnessed impressive traction within Canada in the recent past and are expected to grow at a decent pace leaving enough room for added prospects for the cannabis players. The total market size of the cannabis products has been determined at ~CAD 2.9 billion, and it is expected to touch ~CAD 5.4 Billion by 2022.

Source: Company Presentation

• Upcoming Facilities to support future growth: The company is about to start its operations across the K2 (area of 42,000 sq ft.) facility which would provide end-to-end CPG supply chain capabilities. Moreover, the group’s GTA facility is ready for licensing in Q2FY21 and would be used for white label and custom manufacturing for beverages and other 2.0 & 3.0 products. The beverage segment is likely to grow in the coming days and would support the company’s future expansion too.
• Australia, the next leg of growth: Australia continues to be one of the dominant markets within the cannabis segment, and the market size stands at ~CAD 50 million. The industry offers ample room for pure CBD oil, cream, tincture, sprays etc.

                                                         
Source: Company Presentation

Q3FY20 Financial Highlights:

• VLNS posted revenue of CAD 18.517 million, higher than CAD 16.461 million in Q3FY19. The increase was supported by increasing traction from the company’s white label cannabis 2.0 product due to higher frequency and size of purchase orders from the provinces and the sale of bulk winterized and distillate oil. This was partially offset by reduced shipments of biomass from extraction partners on account of COVID-19 pandemic.
• The group reported a loss from operations at CAD 3.362 million, as compared to a profit of CAD 5.523 million in the previous corresponding period (pcp). The decline was primarily attributed to a higher depreciation and amortization costs (CAD 2.588 million versus CAD 0.609 million in Q3FY19), higher wages and salaries and general and administrative, increase in professional fees.
• The company reported a net loss of CAD 3.064 million, as compared to a net profit of CAD 5.893 million in pcp.

Q3FY20 Financial Snapshot (Source: Company Reports)

Risks: Due to the rise in the input costs, the company reported a decline in its profitability, which is a reason for concern. Addition of new facilities would likely to fuel its depreciation and amortization, which might further dampen the profitability.

Stock Recommendation:

The corporation remains as one of the leading cannabis extraction and custom manufacturing companies across Canada while VLNS is shifting its focus to the formulation, manufacturing and launching of additional product SKUs into the cannabis 2.0 market for the industry partners, which is expected to support the company’s future growth prospects. Further, its shares are trading above the crucial short-term support level of 50-day SMA. On the valuation front, the stock is trading at a forward EV to sales multiple of 1.99x against the peer group average of 2.98x. Considering above facts, new business opportunities, we recommend a ‘Speculative Buy’ on the stock at the closing price of CAD 1.75 on November 25, 2020.

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

Charlotte's Web Holdings Inc.

Charlotte’s Web Holdings Inc. (TSX: CWEB) is engaged in the production and distribution of hemp-based cannabidiol (CBD) wellness products. The company’s product categories include tinctures (liquid product), capsules and topical products. 

Key Highlights:

• Collaboration with University at Buffalo: The Company’s Recent collaboration with University at Buffalo and Charlotte's Web for Integrated Global Biomedical Sciences for advance hemp cannabinoid science would likely to provides a better understanding of the therapeutic uses and safety of cannabinoids and would further enhance research facilities.
• Growth revival from B2B segment: The company reported solid growth from its B2B operations aided by 20% y-o-y growth led by natural retail, while healthcare practitioner has reported a robust growth of 101% on y-o-y basis. We expect the strong momentum to continue in the foreseeable future, which would likely to drive the group’s growth.
• Enhanced Distribution: The company has enhanced its presence through the expansion of the company’s retail footprints. During the third quarter of FY20, the company added ~1000 new retail stores, which includes natural retailers, ~300 independent pet stores and approximately 500 new F/D/M retail doors.
• Technical breakout: Further, its shares have registered a technical breakout on the daily price chart, with stock breached over its long-term phycological resistance level and moving higher, which is a bullish price indicator. Moreover, its shares were trading well above the crucial short-term support level as well.

Q3FY20 Financial Highlights:

• CWEB announced its quarterly results, wherein the company posted revenue of USD 25.156 million, at par with USD 25.045 million in the previous corresponding period (pcp).
• Gross profit slide to USD 14.757 million, from USD 17.881 million in Q3FY19, due to a significantly higher cost of sales (USD 9.898 million versus USD 7.181 million in pcp).
• The company posted an operating loss of USD 13.55 million, compared to a loss of USD 1.719 million, a year ago, due to a higher general and administrative expense and sales and marketing costs. A considerable increase in the research and development expense (USD 1.984 million versus USD 0.255 million in Q3FY19) also supported the fall.
• The company ended the quarter with a cash balance of USD 65.891 million, while total assets stood at USD 330.46 million.                 

Q3FY20 Income Statement Highlight (Source: Company Presentations)

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

Valuation Methodology (Illustrative): EV to Sales based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation 

The stock of CWEB corrected ~36% so far this year. The company has enhanced its retail presence during the last quarter, which would cater to higher customer-base, which auger well for improved business prospects. Moreover, we believe, with the increasing traction across the healthcare segment, the corporation would drive improved sales volumes in the coming days. The stock gained ~60% and ~39% in the last one-month and three-months, respectively. 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 Cresco Labs Inc, Tilray Inc etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 6.30 on November 25, 2020.

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

Disclaimer

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