The Valens Company Inc.

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

Key Highlights:

• Growing Retail Presence: In the recent past, the cannabis segment showed tremendous growth driven by strong momentum from flower-based and Oil-based products, which is impressive. The potential of the segment is huge and is expected to reach more than CAD 10 billion. We believe, the company has the upper hand as compared to the competitors, as the group has end-to-end functions from cultivation, processing, branding and sales.

Source: Company Reports

• Expansion through acquisition: Recently, the group announced the acquisition of LYF Food Technologies Inc. at a price consideration of CAD 24.9 million, and an additional CAD 17.5 considering the business achieves certain earn-out EBITDA milestones. In order to fund the acquisition, the group would sell 17,080,000 units of the Company to ATB Capital Markets Inc (underwriters) at a price of CAD 2.05 per Unit for gross proceeds of CAD 35.014 million. The acquisition would boost the company’s production capabilities for the 2.0 and 3.0 markets, and the company’s modernize platform, which supports the fastest growing product segments within the cannabis industry.

• Improved Guidance: The group expects its Q4FY20 revenue within the range of CAD 17 million to CAD 18.5 million, while net revenue is expected in between CAD 15 million to CAD 16.5 million, reflecting a growth of ~250% on q-o-q basis. For the first quarter of FY21, the company expects its revenue between CAD 19 million to CAD 23 million, aided by the company’s newly launched and operational of K2 facility.

Q3FY20 Financial Highlights:

• VLNS announced its third-quarter results, wherein the company posted revenue of CAD 18.517 million, as compared to CAD 16.461 million in the previous corresponding period (pcp). The increase was aided by a higher traction for the company’s white label cannabis 2.0 product supported by higher frequency and size of purchase orders from the provinces and the sale of bulk winterized and distillate oil, partially offset by lower shipments of biomass from extraction partners on account of COVID-19 pandemic.
• The corporation posted a loss from operations at CAD 3.362 million, versus a profit of CAD 5.523 million in Q3FY19. The slide was due to an increase in depreciation and amortization costs (CAD 2.588 million versus CAD 0.609 million in pcp), higher wages and salaries (CAD 2.428 million versus CAD 0.797 million in pcp) and increase in general administrative costs (CAD 0.697 million versus CAD 0.116 million in Q3FY19), and a significantly higher professional fees (CAD 0.888 million versus CAD 0.332 million in pcp).
• The company reported a net loss of CAD 3.064 million, as compared to a net profit of CAD 5.893 million in pcp.
• The company reported a cash balance of CAD 30.257 million, while total assets were recorded at CAD 193.857 million.

Source: Company Reports           

Risks: Change in consumer preferences, and entry of new products would lead to a decline in the company’s overall volume. Moreover, an increase in the raw material prices might take a toll on the group’s margin.

Stock Recommendation:

Due to the fall in raw material (oil inventory) prices, the group is expected to report higher margins from the related products. Moreover, the company intends to offer its products at a lucrative price, which would further support overall volumes. Moreover, the group would innovate its products and would scale its business by taping the large consumer packaged goods companies. However, rising input costs might hinder the company’s margins. On the valuation front, the stock of VLNS is available at a significantly lower valuation as it is trading an EV to Sales multiple of 2x on NTM basis, as compared to the industry (Pharmaceuticals) median of 4.3x. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 1.82 on January 27, 2021.

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

Glacier Media Inc

Glacier Media Inc (TSX: GVC) is a Canada based company, which offers information and marketing solutions. It operates in three segments Environmental, Property and Financial Information, Commodity Information and Community Media. 

Key highlights 

• Acquires GeoSearch: Recently, the company announced that its associate, GVIC Communications Corp., has purchased the business assets of GeoSearch LLC, a provider of environmental risk information based in Austin, Texas. The asset purchase was completed through ERIS Information Inc. and ERIS Information Limited Partnership, 55% owned subsidiaries of GVIC. The management expects that this acquisition would strengthen ERIS’s US operations and improve its business's overall scale.

• Reduced debts: As of September 30, 2020, the company’s total current and long-term debt stood at CAD 10.6 million, down from CAD 26.5 million as of June 30, 2020. Reducing the debt level helps the company to boost its margins and profitability. This also implies a lower balance sheet risk. 

• Improvement on the sequential basis: The Company is regularly monitoring the COVID-19 conditions and is responding accordingly. They witnessed a gradual recovery in revenues, when compared on a sequential basis. The Company is working to maintain sufficient operating income levels and make concerted efforts to bring revenues back further and increase profits and cash flow.

Source: Company 

• Increase in cash from operating activities: The company implemented some extensive measures to reduce operating expenses to ensure its businesses can operate profitably. Furthermore, they have been working to strengthen its financial position. Cash flow generated from operations after changes in non-cash working capital stood at CAD 10.0 million compared to CAD 2.0 million in the previous corresponding period.

Source: Company 

Financial overview of Q3 2020 (expressed in Thousands of Canadian dollar)

Source: Company 

• In Q3 2020 the company reported CAD 35.3 million revenue, compared to 48.2 million in the previous corresponding period. The revenue fell primarily due to declining print advertising revenue and the cyclical nature of certain businesses of the group. On the flip side, on a sequential basis, the company registered a growth of CAD 4.4 million in revenues in Q3 2020. 
• The company's gross profit stood at CAD 17.7 million in Q3 2020, compared to CAD 11.9 million in pcp. Gross profit as a percentage of revenues also increased to 50.2% in the reported quarter, against 24.6% in Q3 2019.
• The company turned around from loss to profit, by registering a profit of CAD 2.4 million in Q3 2020, against a loss of CAD 2.9 million in the previous corresponding period. The main reasons behind this turnaround were lower direct expenses, lower interest cost and lower depreciation. 

Risks associated with investments 

The company derives its revenues from selling advertising and subscriptions related to its publications; a drop in the subscription level can lead to adverse results. Other risk factors include foreign exchange rate fluctuations, the seasonal and cyclical nature of the agricultural and energy sectors, discontinuation of government programs, general market conditions in Canada and the United States, changes in the prices of purchased supplies including newsprint, and cybersecurity risk. 

Stock recommendation 

While the pandemic is still affecting the Company’s businesses to varying degrees, its digital media, data, and information businesses have held up relatively well. Revenues have begun to recover in several areas and are gradually improving on an overall basis. The Company also implemented some extensive measures to reduce operating expenses to ensure its businesses can operate profitably at the reduced revenue levels without the wage subsidy. Furthermore, they have been working to strengthen its financial position and operating profitability during the pandemic and expects that as time progresses, and the pandemic abates, revenues will recover. On the valuation front, the stock is available at TTM EV/EBITDA of 4.6x against the industry (Media & Publishing) median of 5.1x. Hence, considering the rationale mentioned above, we have given a “Speculative Buy” rating in the stock at the closing price of CAD 0.425 on 27 January 2021.

Share price performance

Technical Price Chart (as on January 27^th, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.