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Alta Corp Capital initiates coverage of Valens GroWorks with $5 price target and Outperform rating

The analysts said Valens is a “best-in-class” extraction and manufacturing company focused on advanced R&D and proprietary extraction processes

A marijuana plant and bottle of oil
Valens plans to launch its own branded products by the end of March 2019

Analysts at Alta Corp Capital initiated coverage Monday of Valens GroWorks Corp (CSE:VGW) with an Outperform rating and a 12-to-18 month price target of C$5.

Valens, known for its extraction capabilities, recently inked a multi-year extraction agreement to process Canopy Growth Corp’s (NYSE:CGC) (TSX:WEED) whole flower and trim into high-grade cannabis resin.

“Valens is a best-in-class extraction and manufacturing company focused on advanced R&D and analytical testing, proprietary extraction processes, product development and cultivation activities within the cannabis sector,” wrote Alta Corp Capital analysts David M Kideckel, Matthew Pallotta and Kevin Hoang in a note to clients.

READ: Valens GroWorks inks extraction agreement with Canopy Growth

“We view Valens as one of the premier businesses within the cannabis sector, and believe that the company is ideally positioned to benefit from the expected evolution of the cannabis consumer consumption patterns, namely, the shift from dried flower towards consumer packaged goods (CPG) extract products (eg. vape pens, edibles, beverages),” they added.

The analysts wrote that Valens was “positioned as an attractive acquisition target.”

“Given the relatively high margins on extraction services, larger cannabis producers are incentivized to internalize these processes. With our view of Valens as an industry leader, we see them as an attractive take out target by larger cannabis companies looking to acquire industry-leading extraction and laboratory testing capabilities,” wrote the analysts.

Diversified strategy

The analysts noted that Valens has a diversified strategy which “provides optionality to move further downstream” with branded products.

“Valens has developed built-in optionality via a diversified strategy which allows them to shift into further downstream activities, specifically, the development and marketing of their own branded products,” wrote the analysts.

Last October, Valens had taken part in Canopy Growth’s CraftGrow program, which allows craft producers to utilize Canopy’s sales channels to market their products.

With a cultivation license in hand, Valens plans to launch its own branded products via CraftGrow for the medical and recreational markets by the end of March 2019.

Investment thesis

The analysts said they viewed Valens as one of the "premier businesses" within the cannabis sector.

“The company’s deep expertise in laboratory testing, R&D, and extraction processing, coupled with their partnerships with industry-leading companies such as Thermo Fisher Scientific and Tarukino, will, in our view, allow the company to achieve and maintain a leadership position in extraction processing services, as well as to develop and market a differentiated portfolio of cannabis products,” wrote the analysts.

“We also view Valens as amongst the most undervalued businesses in the cannabis sector, offering investors with extremely favourable gross margins,” they added while forecasting the company would generate “significant free cash flows” on an annual basis beginning in fiscal 2020.

Valens recently teamed up with Thermo Fisher Scientific Inc (NYSE:TMO) and plans to use the company’s instruments to study cannabis.

Valens also has a partnership with Tarukino, a US-based cannabis beverage manufacturer and leader in emulsification technology.

 

Contact Uttara Choudhury at [email protected]

Follow her on Twitter@UttaraProactive 

-- Updates with details on partnerships with Thermo Fisher Scientific and Tarukino --

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Price: 2.43 CAD

TSX:VLNS
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Market Cap: $310.34 m
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