This morning Raymond James initiated coverage on The Valens Company (TSX: VLNS) with a C$4 price target and Outperform rating. They believe that Valens’ strategy of developing IP and offering more comprehensive services and products as a way of building a moat or barrier is the best thing they could have done.
Further, Raymond believes that the extraction business will become commoditized as licensed producers to start building their own in house extraction systems. They are overall cautious and placed a conservative price target for that reason.
Raymond James breaks down the investment thesis base case alongside some upside and downside notes and potential catalysts they are watching for. The firm believes Valens has a differentiated and robust position with multiple multi-year agreements with licensed producers (as seen below) in cannabis 2.0, making it very important to the 2.0 value chain.
As of today, Valens currently hold the title for the largest capacity outsourced extractor in Canada. They mention that the way Valens bundles its white-labeling and manufacturing contracts together makes it a “deft move designed to deepen its partner relationships, and to augment and protect the company’s long-term growth.” Although not everything is rosy, Raymond reminds investors that Valen’s is a second-mover in the Cannabis 2.0 space and will need highly unique products and IP to claim a material share of the 2.0 cannabis market.
Below is Raymond James’ three base case scenarios with their notes on upside, downside and some potential catalysts:
Base Case
- Reliable short term revenues from the extraction
- Short-term margin compression which will lead to declining toll revenues
- Expanding white-label and proprietary product revenues
- Slow growing cannabis markets in Canada, Hindered by the slow roll-out of retail stores and undersupply of 2.0 products
Upside
- Displacement of Canadian market participants which will allow Valens to capture larger market share
- Larger gross margins from white-labels and proprietary products
- Expansion into international medical cannabis or CPG markets
- Cannabis 3.0 which allows specific cannabis containing products for minor ailments to be consumed without physician approval.
Downside
- Weak Canadian market penetration
- Faster margin compression due to the commoditization of Valens services
- Issues among the large licensed producers that Valens has tolling agreements with
- Slow or no growth in international markets in the next couple of years
- Negative FDA/WHO comments/opinions on Cannabis’ Safety
Catalysts
- New white-label or tolling agreements
- New proprietary product launches
Information for this briefing was found via Sedar and The Valens Company. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
