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The Valens Company: A global cannabis group, scaling up, and just beginning to show what it was 'made to do'

Snapshot

Previously named Valens Groworks, the group announced a rebranding to 'The Valens Company' in December last year

The Valens Company -

Quick facts: The Valens Company

Price: 2.19 CAD

TSX:VLNS
Market: TSX
Market Cap: $279.68 m
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  • 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, it announced a rebranding to 'The Valens Company' in December last year, to reflect the fact it isn't really a cannabis cultivator.

The firm can process over 425,000 kg 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.

In the second half of 2019, 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.

In February, Valens announced first international shipments of white label products to customers in Australia. Tinctures, totaling over 3,000 units, are expected to be shipped in the second quarter.

How is it doing:

In its fiscal full-year to end November, Valens' focus had been more on the development of partnerships for custom extraction processing of cannabis and hemp biomass, but in the fourth quarter, the strategy shifted to more product development and white label services with licensed and non-licensed partners, which has appeared to pay off.

This area contributed to record revenues as new and existing customers pushed to roll out so-called Cannabis 2.0 oil-based products (edibles and ingestible cannabis products) into the market.

In the fourth quarter, group revenue increased to C$30.6 million, an 86% increase over the third quarter and above the upper-end of the firm's guidance range announced on December 16 2019. For the year as a whole, revenue rose to a record C$58.1 million, while gross profit increased to C$41.4 million.

Underlying earnings (EBITDA) in the fourth quarter came in at  C$17.7 million (58% margin) compared to a broker Mackie's forecast of C$10.3 mm (38% margin), which the group attributed to higher revenue and gross profit, plus lower G&A (general and administration) and marketing expenses. 

As of November 30, the firm had a healthy-looking C$58.7 million in cash and a net working capital position of C$88.2 million.

The Valens Company's white label contracts now outnumber extraction contracts, and include top-tier customers such as BRNT, Shoppers Drug Mart and Iconic Brewing.

Post year-end, the firm began formulating and manufacturing 19 SKUs (stock keeping units) across three product lines and it expects to grow this rapidly throughout 2020 to meet demand for Cannabis 2.0 products, including vape pens, edibles and cannabis-infused beverages.

It also struck an amended manufacturing and sales licence agreement with SōRSE Technology Corp, granting Valens an exclusive licence to use the proprietary SōRSE emulsion technology to produce, market, package, sell and distribute cannabis-infused products in Canada, the UK, Europe, Australia and Mexico.

Other operational highlights in fiscal 2019 included the signing of a multi-year white label agreement with leading cannabis firm BRNT Ltd to launch a line of unique cannabis vape pens in Canada and the acquisition of Pommies Cider Co, a leading Ontario-based beverage company and mature micro-processing license applicant for a total of C$7.6 million.

In its fourth quarter, the firm inked its first beverage agreement with Iconic Brewing to manufacture 2.5 million cannabis drinks over five years.

Meanwhile, in December, Valens signed a four-year deal with cannabis producer Emerald Health Therapeutics Inc (CVE:EMH) that will see it process a minimum of 10,000kg per year of cannabis and hemp biomass, supplied by Emerald. It will also supply Emerald with white label services such as formulation, mixing and filing for products like vaporizers, soft gels and tinctures.

In another deal, Valens will supply edibles producer Dynaleo with distillate or SōRSE emulsions containing a minimum of 40 kilograms of active THC or CBD cannabinoids. The agreement has an initial two-year term with two automatic one-year renewals.

Inflection points:

  • More deals, contracts
  • First-quarter fiscal 2020 results due in April

What the broker says:

In January this year, Canaccord Genuity initiated coverage of Valens with a 'Speculative Buy' rating and a C$8 price target (shares currently around C$3.50). The broker said it expected demand for Valen’s services to remain strong throughout 2020.

Valens is currently Canada's most profitable public cannabis company, the broker noted, adding that the company is expected to keep boosting revenue quarter-on-quarter as it shifts from basic extraction toward sales of higher-value distillate and white-label products.

Meanwhile, following the fourth quarter/full-year results, broker Mackie repeated a 'Buy' rating on Valens shares and a C$8 price target. Its analysts noted that the firm's revenue for the fourth quarter was C$30.6 million, which was 12% ahead of its estimate of C$27.2 million.

"Margins in Q4/19 remained strong, however management expects margins to contract in the coming quarters as it builds out its infrastructure to execute on its strategic shift towards becoming a next-generation product company which offers increased opportunity and greater EBITDA per input gram," Mackie analysts said.

"For F2020, we forecast the white label products will make up approximately 30-40% of total revenue," they added.

What the boss says:

Speaking to Proactive in December, Valens' president Jeffrey Fallows said: "We're really just starting to show what the Valens Company was made to do - Cannabis 2.0, high quality extraction, putting products on the market that nobody else has available, and putting out the product portfolio that will help our customers in the market really distance themselves from the competition."

Looking ahead, Fallows added, the main aim was to take the company's 'great' operational footprint and expanding it into global markets.

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