Mackie Research Publishes Report on Valens
A comprehensive research report created by Mackie Research Capital Corporation has been published focusing on Valens’ recent developments and plans for international markets. The Company continues to be a leader in the market, with a focus on processing raw cannabis to produce quality products. As it speaks for itself, see the below summary and find the link to the full report below.
Valens is Focused on Proprietary Extraction Processes
Valens’ business strategy is focused on producing and selling high-margin products and services from carefully extracted cannabis oil. The company’s revenue streams are primarily derived from three key extraction services: (1) oil, (2) resin, and (3) white label products. We forecast that the majority of the company’s revenue over the near-term will be derived through cannabis extraction tolling agreements with existing ACMPR licensed producers. Through these tolling agreements, the company will process raw cannabis into cannabis resin and finished oils. Management is developing relationships with a number of existing LPs whereby they will process raw cannabis into cannabis resin and finished oils. The company is also looking to develop white label products where it will provide clients with a finished oil or derivative product. The raw material inputs will either be sourced internally or through the wholesale market. The company is currently capable of processing 6,000 kg of raw cannabis per month.
Company is Leveraged to Growth in Cannabis Oils and Derivative Products
The introduction of cannabis oils is positive for the industry and the company, as they will be another factor in increasing the acceptance of medical marijuana as a legitimate treatment option for chronic pain and other medical conditions. According to data from Health Canada, sales of cannabis oils in the most recent quarter (March 31, 2018) were 10,326 kg, up 11% quarter-over-quarter and up 82% year-over-year. Furthermore, with the new development of controlled-dose capsules made from extracted oil, it is believed that demand for concentrates and derivative products will overtake flower sales by 2020. Additionally, the Canadian government has promised the inclusion of cannabis derivatives in Health Canada legislation by end 2019. According to the Deloitte Study, smoking marijuana is still the preferred method of consumption among users in Canada; however, edibles are becoming increasingly popular and they now account for between 6%-13% of total consumption. If the Canadian market follows some of the trends seen in the U.S. where recreational marijuana is legal, products derived from cannabis oils should become a large and growing segment of the market.
Valens Farms Joint Venture will Enhance Company’s Cultivation Capacity
On April 11, Valens announced the creation of a new subsidiary company, Valens Farms, to commercially produce premium quality specialty strain cannabis using dedicated, sustainable monocropping technology, and to further expand its supercritical CO2-extracted cannabis oil capacity. The first initiative for Valens Farms is to complete a 400,000 square foot (Phase 1) controlled-environment strain-segregated hybrid greenhouse as part of a large-scale indoor facility on the 50-acre property through its joint venture with Kosha Projects Inc. As per the agreement, Kosha will contribute the land and all facility development and construction costs. Valens is responsible for all design and outfitting inputs, budgetary guidance, consulting and advisory services during construction and development of the facility. Valens Farms will operate the facility, producing premium quality cannabis and supercritical CO2-extracted cannabis oils. Phase 1 will be completed in a number of stages: currently undergoing construction is the first 50,000ft² (Phase 1A). The estimated cost of Phase 1A is approximately $15 million and management estimates that the first planting will occur in Q1/19 and that the first harvest will be in Q2/19. Once the Phase 1 is fully constructed (400,000 ft²), this facility will be capable of producing more than 50,000 kg/year.
Valens is looking to expand into the international markets, which it believes could provide significant growth opportunities and on August 29th, Valens signed a letter of intent with Colombian licensed producer Eticann S.A.S Zomac. Under the terms of the agreement, the company will purchase cannabis materials from Eticann for use in its proprietary extraction system. In addition, Valens will have exclusive rights to provide extraction services for Eticann’s oil product offerings, will provide related expertise to Eticann for toll processing services in Colombia and surrounding markets, and will be granted the option to purchase up to 50% of Eticann’s issued and outstanding shares. As Valens’ first international supply agreement, this announcement strengthens the company’s intention of capitalizing on international markets under the terms of its Dealer’s License.
Valens Balance Sheet Remains Strong and the Company has “Zero” Debt
The company currently has $5 mm in net cash and has fully funded its cannabis production and extraction processing facility in Kelowna, B.C. This strong cash position will also allow management to pursue strategic acquisitions and address potential working capital requirements.
Initiating with a Buy Recommendation and a $4.50 Target Price
We are initiating coverage of Valens GroWorks Corp. with a BUY rating and target price of $4.50 per share. To arrive at our target price, we applied a 12x EV/EBITDA multiple to our 2020 estimate and then discounted the result using a 15% discount rate.