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. 

Why should investors Exit?

• Weak operational efficiency: For Q3FY21, the company posted a negative EBITDA margin and negative operating margin of 60.6% and 65.3%, respectively, as compared to the industry median of 25.5% and 15.5%, respectively. Moreover, the company reported a negative net margin of 61%, as compared to the industry median of 7.2%. This shows that the company is struggling with its input costs and continuation of the above trend might lead to lower operational efficiencies.

• Lengthy cash conversion period: The company reported a significantly higher cash conversion period of 316.2 days, as compared to the industry median of 138.5 days. This suggests that the company is taking ample time to convert its inventories to cash flows when compared to the industry median.

• Reported higher loss from operations: On a YTD basis, the company posted an increase in Advertising, commission, and selling costs, higher General and administrative costs and an increase in Professional fees etc. This has resulted to an increase in operating expenses of CAD 46.3 million in 9MFY21, as compared to CAD 32.095 million in pcp. Hence, loss from operations expanded to CAD 31.8 million in 9MFY21, as compared to CAD 0.3 million in pcp. Continuation of the above trend is likely to impact the upcoming performances.
  

  Valuation Methodology (Illustrative): EV to Sales based.

Analysis by Kalkine Group

Stock Recommendation:

The stock of VLNS has closed below its 50-days and 100-days simple moving averages, which indicates a bearish pattern. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Sundial Growers Inc, Flower One Holdings Inc etc. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock at the current market price of CAD 2.29 at 9:45 am Toronto time on January 25, 2022.

One-Year Technical Price Chart (as on January 25, 2022). Analysis by Kalkine Group

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

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