MediPharm Labs Corp.

MediPharm Labs Selected for First Real-World Evidence, Patient-Centred Clinical Trial Using Blockchain Technology: MediPharm Labs Corp. (TSX: LABS) is a licensed producer for cannabis oil production under the Access to Cannabis for Medical Purposes. As on 17 July 2020, the market capitalization of the company stood at ~CAD 156.85 million. The company has recently announced its participation in collaboration between University Health Network and Medical Cannabis by Shoppers Inc. that will use blockchain technology to track medical cannabis products from seed to sale.

MediPharm Labs Expands Innovative CBD Product Portfolio: The company has announced a further expansion of its branded products with the retail introduction of CBD25:5 Release Formula. This is ideal for medical patients and adult users who wish for full-spectrum cannabis oil in a specially formulated ratio of ~25mg/ml of CBD and 5mg/ml of THC, harnessing the properties of both cannabinoids.

Quarterly Update (For the Period Ended 31 March 2020): During the first quarter, MediPharm Labs reported a decline of 49.5% in revenue of CAD 11.1 million due to a reduction in volume and average selling price of bulk concentrates sold. In the same time span, continued oversupply in the Canadian domestic bulk concentrates market, and a reduction in the average selling price and volume of bulk concentrates resulted in a gross loss of CAD 10.9 million.

Quarterly Performance (Source: Company Reports)

Key Risks: The company is exposed to various risks, including general business, economic, competitive, political, and social uncertainties; the inability of MediPharm Labs to obtain adequate financing; the delay or failure to receive regulatory approvals.

Stock Recommendation: The company is maintaining decent liquidity levels and has shown financial strength to prudently develop the business for the longer-term. As per TSX, the stock is trading close to its 52-week low of CAD 1.08, proffering a decent opportunity for accumulation. On a TTM basis, the stock is trading at an EV/Sales multiple of 1.6x, lower than the industry median (Healthcare) of 7.6x, and thus seems undervalued. Considering the attractive trading levels, lower EV/Sales multiple, and impact of COVID-19, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 1.16, down by 2.521% on 17 July 2020.

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

The Valens Company Inc.

Significant Increase in Revenue: The Valens Company Inc. (TSX: VLNS) is a developer and manufacturer of cannabinoid-based products. As on 17 July 2020, the market capitalization of the company stood at ~CAD 267.51 million.

Quarterly Performance Highlights For the Period Ended 31 May 2020: During the second quarter ended 31 May 2020, the company has achieved many milestones and reported a significant increase of 100.3% in revenue to CAD 17.6 million, up from CAD 8.8 million in the second quarter of 2019. This resulted in an increase in gross profit to CAD 6.3 million as compared to CAD 5.1 million in the second quarter of 2019. In the same time span, the company reported an adjusted EBITDA of CAD 2.7 million, up from CAD 2 million in the pcp. The company also retains a healthy balance sheet with cash and short-term investments of CAD 45.1 million and a net working capital position of CAD 90.5 million. The second quarter also saw an increase in the number of agreements and is expected to drive revenue in the second half of fiscal 2020. The Valens Company manufactured a record of 36 SKUs in the second quarter of 2020 as compared to 9 SKUs in the first quarter of 2020.

Quarterly Financial Performance (Source: Company Reports)

Key Risks: Apart from regulatory risk and United States border crossing and travel bans, the company is exposed to a variety of risks including competition, dependence on the supply of cannabis and reliance on other key inputs, dependence on senior management and key personnel, general business risk and liability, regulation of the cannabis industry, compliance with laws, reliance on a single facility, limited operating history, vulnerability to rising energy costs, unfavorable publicity or consumer perception.

Outlook: 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 remains focused 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.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The retail demand for cannabis has surged during the COVID-19 pandemic and hence, the company is experiencing strong white label sales. The stock is trading close to its 52-week low level, proffering a decent opportunity for investors to enter the market. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered OrganiGram Holdings Inc, Rubicon Organics Inc, Fire & Flower Holdings Corp, as peers. Considering the attractive trading levels, increasing growth in revenue, and expansion of the company in the Australian market, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 2.09, down by 5% on 17 July 2020.

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

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