viewThe Valens Company

Valens scales up and begins to show what it was 'made to do'


Valens has shown recently that it has become one of the lowest-cost cannabis platforms

The Valens Company -

Quick facts: The Valens Company

Price: 1.74 CAD

Market: TSX
Market Cap: $258.45 m
  • Canada's most profitable public cannabis company
  • A vertically integrated group with global reach
  • Moving towards sales of higher-value distillate and white-label products
  • Global legal marijuana market expected to reach US$146.4 billion by 2025

What Valens Company does:

The Valens Company (CVE:VLNS) (OTCMKTS:VLNCF) is a profitable British Columbia-based producer of cannabis products, medical and recreational, and it is scaling up operations.

Previously named Valens Groworks, the company rebranded its name to reflect the fact it is no longer just a cannabis cultivator.

The firm can process over 425,000 kilograms of biomass per year and its services include numerous types of proprietary extraction, analytical testing, formulation, cultivation, and research, as well as white label product development.

In 2019, the company said it became the largest white label product development, manufacturing, and third-party extraction firm in Canada. It offers CO2, ethanol, hydrocarbon, solvent-less, and terpene extraction. Its products include tinctures, two-piece caps, soft gels, oral sprays, and vape pens as well as beverages, edibles, injectables, and natural health products and it has a strong pipeline of next-generation products in development.

Valens broadened its offering to include white-label product development and it now produces a portfolio of products to help partners build brands.

The group has five wholly-owned subsidiaries - Valens Agritech, Valens Farms, Supra THC Services, Valens Labs Ltd, and Southern Cliff Brands Inc. Valens Labs is a Health Canada licensed, accredited cannabis testing lab providing sector-leading analytical services and the firm has partnered with Thermo Fisher Scientific to develop a Centre of Excellence in plant-based science.

How is it doing:

In early February 2021, Valens said it had received an amendment to its existing Health Canada standard processing licence, permitting the sale of dried cannabis products to authorized provincial and territorial retailers in Canada. 

The company noted that the licence amendment will allow it to start selling and distributing pre-rolls and dried cannabis derivative products, which Valens expects will begin in 2Q 2021, increasing its total addressable market. 

It had previously reported shipping its first cannabis derivative products from the company’s new K2 facility in Kelowna, which manufactures white label and custom products.

Valens also announced the launch of its nuance branded CBD 100 product, a high-potency CBD-dominant oil that will be available in the Medical Cannabis by Shoppers marketplace in the coming weeks. 

And, the company said its third Canadian manufacturing facility, which is located in the Greater Toronto Area (GTA), is now in the final stages of construction and will provide an additional 30,000 square feet of capacity, while focusing on the formulation, co-packing, and manufacturing of cannabis-infused beverages and other customized Cannabis 2.0 and 3.0 products using SōRSE by Valens emulsion technology. 

Earlier in 2021, Valens announced an agreement to acquire premier edibles manufacturer LYF Food Technologies Inc, based out of Kelowna, British Columbia, in a cash-and-stock transaction valued at C$24.9 million, plus up to an additional C$17.5 million in consideration payable upon the business achieving certain earn-out EBITDA milestones. 

Valens said the acquisition is expected to be accretive to the company's EBITDA and diluted EPS in 2021 and, if all of the milestones are met, the transaction represents an around 4.2x multiple on the last milestone achieved. 

Prior to the acquisition, Valens provided a corporate update showing that it has become one of the lowest-cost cannabis platforms following a realignment of its inventory to drive growth in 2021.

The company said it has achieved two “core objectives” with the completion of this strategic initiative. First, it said it has reduced the average price of its oil inventory by over 50% and can now rebuild its inventory with targeted strains of dried cannabis sourced at opportunistic, lower price points that will expand product gross margins in 2021.

On the financial side, Valens recently reported a 44% increase in its fiscal 2020 net revenue to $83.8 million, as the company’s Cannabis 2.0 market share in Alberta, British Columbia, and Ontario increased to approximately 4.9% in the fourth quarter according to Headset data.

Valens also said its provincial sales grew 292% quarter over quarter in 4Q, transforming the company into the largest third-party cannabis product manufacturer in Canada.

And Valens also completed a bought-deal equity offering in January, at a price of C$2.05 per share, for total gross proceeds of $39,696,200, which the company said will be used for a portion of the cash component of its pending acquisition of LYF Food Technologies and to pursue other strategic M&A and business expansion opportunities in Canada and international markets.

What the broker says:

In a recent note to clients,  Stifel Nicolaus Canada increased its target price on Valens Company shares to $3.75 from $3.35, while maintaining a ‘Buy’ rating on the stock, after the cannabis extraction company reiterated its 1Q 2021 revenue guidance, with the broker's analysts noting that the guidance in-line with their expectations while “demonstrating a strong return to growth to start the year.” 

The Stifel analysts see even further upside as Valens executes on its strategic plan and returns to profitability. “More importantly, management provided a glimpse behind its strategy to enter the flower/pre-roll market, essentially doubling its addressable market,” they said.

The analysts noted that key details from the company included leveraging existing partnerships with the decision prompted by customers, suggesting a demand-pull versus a supply-push. As well, Valens said it expects to enter the Manitoba and Quebec markets near-term, which the analysts believe will unlock about 20% more market potential while compounding the company’s flower entry.

The Stifel Nicolaus Canada analysts said the company’s planned expansion into Manitoba and Quebec could add about $740 million in potential Canadian retail sales.

They also singled out Valens' opportunity in Quebec, where Cannabis 2.0 product limitations in Canada’s third-largest cannabis market have resulted in an edibles space dominated by beverages. The analysts noted that Valens could potentially expand its market share in the French-speaking province given its proximity to the company’s Greater Toronto Area (GTA) facility, which specializes in beverage manufacturing.   

As well, the analysts highlighted the company’s “impressive accomplishment” of manufacturing one out of every five vape products in its recreational market, noting that Valens is expected to launch gummies beginning in 2Q 2021 as a second step in its edibles strategy, which they believe will drive sales growth as the company should be able to replicate its historical success in the broader edibles category.  

“Overall, we believe Valens' expanded positioning provides investors with a more fulsome Canadian market exposure at a valuation unjustifiably discounted versus (other) junior Licensed Producers,” they concluded.

Inflection points:

  • More deals, contracts
  • First-quarter fiscal 2021 results due in April

What the boss says:

Commenting in Valens recent corporate update, CEO Tyler Robson said: "Looking into 2021, we wanted to clear the deck and increase our flexibility to make a much more aggressive push into the market with new, innovative products, including several exciting opportunities in the Health & Wellness category, at highly competitive prices."

He added: “Adding low-cost inputs to our already low-cost manufacturing infrastructure makes us tough to beat and will help us secure a cost leadership position in the market."

Contact Sean at sean@proactiveinvestors.com

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