RE:RE:RE:RE:AltaCorp rates VGW Outperform and increases target to $7 ...I do not have a link to the report. It is proprietary research for AltaCorp clients / institutional desk. I have a PDF copy.
I tried taking a snap of page 1 but it didn't post. I'll try to use a copy text approach:
VGW | CSE
Market: $3.09
Rating: Outperform
One Year Target: $7.00
(Previously C$5.00)
Total Return: 126.5%
March 14, 2019
Financial Metrics (C$)
Shares O/S (mm): 93.2 Di l . Mkt. Cap ($mm): $374
FD Shares (mm): 121.0 Di l . Net Cash ($mm): $51
Price: $3.09 Ent. Value ($mm): $323
12-Month Target: $7.00 Impl ied Return: 126.5%
FYE Nov 30 2018A 2019E 2020E 2021E
Revenue ($mm) 0.1 43.5 118.7 171.1
Growth (y/y) 27% 84,266% 173% 44%
Adj. Gros s Profi t ($mm) 0.0 36.8 92.1 121.6
Gros s Margin 39% 85% 78% 71%
Adj. EBITDA ($mm) (7.3) 20.5 68.6 89.5
Adj. EBITDA Margin - 47% 58% 52%
EV/ Adj. EBITDA - 15.8x 4.7x 3.6x
Q4/18A Q1/19E Q2/19E Q3/19E
Revenue ($mm) 0.0 2.4 6.3 12.9
Adj. Gros s Profi t ($mm) 0.0 2.2 5.7 11.0
Adj. EBITDA ($mm) (2.3) (1.0) 1.8 6.6
1x DCF 11.5%
David M. Kideckel, PhD, MBA
Analyst, Managing Director
647 776 8240
dkideckel@altacorpcapital.com
Kevin Hoang, CPA, CA
Associate
647 776 8220
khoang@altacorpcapital.com
Fiscal Year 2018 Results In Line with Estimates, Management Demonstrates Ability to Execute
Event: Valens reported their financial results for the year ended November 30, 2018. Overall we view the release as positive, as financial results were in line with our estimates
but most importantly, management has demonstrated their ability to successfully execute on their near-term business strategy, acquiring multiple high-profile tolling agreements during this quarter.
Highlights:
Financial Results: Valens reported results for the year ended November 30, 2018, with modest top-line figures that exclude extraction revenues, which are expected to come online in the next quarter. Adj, EBITDA came in at ($7.3mm) compared to our estimate of ($7.4mm) and EPS came in at ($0.22) compared to our estimate ($0.13). Given that derivative-type cannabis products will not become legal in Canada until late 2019, these results are in-line with our view of how the extraction market in Canada is evolving.
Newly Announced Tolling Agreements: During the F2018, Valens announced several new extraction service agreements and have now developed a healthy pipeline of tolling revenues from leading industry partners including: Canopy Growth Corporation (WEED-CA, NR), Tilray (TLRY-US, NR), The Green Organic Dutchman (TGOD-CA, NR), Organigram (OGI-CA, NR), Sundial (private), Speakeasy (EASY-CA, NR), Harvest One (HVT- CA, NR) and GTEC (GTEC-CA, NR).
Change in Estimates: To date, management has tracked to our financial and strategic
expectations. Based on management’s success with their contractual wins with significant players within the cannabis space as said above, we believe that management has significantly de-risked our financial estimates, which necessitates our reduced discount rate from 15% to 11.5%.
Maintain Outperform, raising our target price to $7.00: We maintain our Outperform rating and raise our 12-month price target from $5.00 to $7.00. Our target price is based on our discounted cash flow (DCF) valuation, using an 11.5% discount rate and 3% terminal growth rate.
Summary of Results
Financial Results
Valens reported results for the year ended November 30, 2018, with modest top-line figures that exclude extraction revenues, which are expected to come online in the next quarter.
Adj, EBITDA came in at ($7.3mm) compared to our estimate of ($7.4mm) and EPS came in at ($0.22) compared to our estimate ($0.13), which is largely due to share-based compensation coming in higher than expected and a one-time loss recorded by the Company relating to the promissory note receivable.
F2018 Results Summary
Figure 2. F2018 Results Summary
Source: Company reports, AltaCorp Capital Inc., FactSet
Strong Pipeline of Tolling Revenues Expected to Materialize in the Coming Quarters
Valens has acquired various extraction service agreements with multiple industry leaders and have now developed a healthy pipeline of tolling revenues with: Canopy Growth Corporation, Tilray, The Green Organic Dutchman, Organigram, Sundial, Speakeasy, Harvest One and GTEC.
Furthermore, the Company has signed multiple LOIs and are currently in discussions with
international companies to pursue potential opportunities abroad, Valens intends to focus on the Australian, Colombian and European markets in the near-term.
Valens Looks to Become a Leader in Hemp Extraction
Aside from cannabis extraction, Valens is also pursuing opportunities in hemp extraction and looks to become a leader in the space. Recently, the Company announced extraction agreements with TGOD, which is primarily hemp based, positioning Valens as a leading certified organic processor in the cannabis industry, utilizing certified organic extraction methods.
We note however, that we have not quantified the revenues from hemp extraction as incremental to our current estimates as we had previously assumed these agreements would be related to the extraction of cannabis. In our discussions with management, although the pricing of hemp differs from cannabis, Valens intends to price based on hemp throughput (which would be significantly higher than cannabis). Furthermore, the efficiency in hemp extraction is approximately 4x greater which would result in a net neutral impact to our current tolling revenue estimates.
Primary Goals for the 2019 Fiscal Year
For fiscal 2019 the company aims to focus on the following:
• Execute on existing extraction contracts with industry partners
• Secure additional extraction and product development contracts
• Receive EU GMP certification and enter the international marketplace
• Expand its offerings into the cannabis-infused beverage, edibles and concentrates markets
• Geographic facility and capacity expansion
We are extremely confident in Valens’ ability to achieve these goals based on what we have seen from the Company thus far. In our view, Valens will continue to execute on their diversified business strategy, allowing them to significantly ramp up the business to generate meaningful revenues in 2019.
Actual ACC Consensus
Sales ($Cmm) 0.1 0.1 0.1
Adj. EBITDA ($Cmm) (7.3) (7.4) (7.2)
EPS (C$) ($0.22) ($0.13) ($0.13)
F2018
Valens Labs Obtained ISO 17025 Accreditation
The ISO 17025 accreditation obtained by Valens Labs makes them the first Health Canada licensed laboratory using cannabis as its matrix in Canada to achieve this accreditation. In our view, this accreditation will become critical as the edibles market comes online later this year.
Given the rigorous standards we have already seen from Health Canada for cannabis, it is safe to assume that the standards for the edibles market will be similar if not even greater. This accreditation will give LPs certainty that they are producing and receiving high-quality and safe products, which will ultimately translated back to the consumer. We view this as critical in
building consumer loyalty and brands, especially since current Health Canada regulations are
extremely prohibitive insofar as the type of content companies can brand with on products.
Forecast and Outlook
Estimate Revisions
To date, management has tracked to our financial and strategic expectations. Based on management’s success with their contractual wins with significant players within the cannabis space including: Canopy Growth Corporation, Tilray, The Green Organic Dutchman, Organigram, Sundial, Speakeasy, Harvest One and GTEC, we believe that management has significantly de-risked our financial estimates, which necessitates our reduced discount rate from 15% to 11.5%.
Company Outlook
In our view, Valens successfully achieved its fiscal y/e objectives, and is well positioned to
achieve its F2019 ones. As our financial forecast at launch (link) included most of the
announced contracts and their contributions to estimates, we feel very confident with
manage ment’s ability to execute on its stated objectives moving forward. As a result, we arereducing our discount rate to 11.5% (from 15%) to reflect this. With the Canadian government expected to legalize derivate-type cannabis products (eg vape pens, edibles, beverages) in late 2019, we expect Valens to be ready on day 1. Their core expertise in extraction, coupled with their key partnerships with Thermo Fisher Scientific (TMO-US, NR) and US-based beverage company, Tarukino (private), position Valens to lead the way in extraction.
From an international outlook, Valens has stated that “geographic facility and capacity expansion” as well as “EU GMP certification to enter the international marketplace” are among their primary goals for 2019. Management has indicated to us that they toured a large number of CBD-based European facilities in early 2019 to assess a plethora of business opportunities. While not modelled in our forecast, we feel that should Valens enter the European market, this would offer much upside to our estimates.
Lastly, we believe that Valens’ ISO 17025 accreditation for cannabis testing should not be
underestimated. In particular, this accreditation will give LPs certainty that they are producing
and receiving high-quality and safe products. According to the Company, “this accreditation makes Valens Labs the first Health Canada licensed laboratory using cannabis as its matrix in Canada to achieve this accreditation.” We believe that as edibles come online in Canada in late 2019, consumers will receive this accreditation very well as the technical aspect of it allows for very high-quality product. We believe this play a key role in building consumer loyalty and brands.
Valens GroWorks Corp.
Calculation of our Target Price
We maintain our Outperform rating and raise our 12-month target price from $5.00 to $7.00. Our target price is based on our discounted cash flow (DCF) valuation, using an 11.5% discount rate and 3% terminal growth rate.
Valuation Sensitivity
Discount Rate
7.1 10.5% 11.0% 11.5% 12.0%
12.5%
2.0% $
2.5% $
3.0% $
3.5% $
4.0% $
7.54 $
7.82 $
8.13 $
8.49 $
8.90 $
7.11 $
7.34 $
7.61 $
7.91 $
8.25 $
6.72 $
6.92 $
7.15 $
7.41 $
7.70 $
6.36 $
6.54 $
6.74 $
6.96 $
7.21 $
6.05
6.20
6.38
6.57
6.78
Figure 3. Valuation Sensitivity Source: AltaCorp Capital Inc.
Key Risks to Target Price
Regulation: The legal recreational and medical cannabis sector in Canada is a new and rapidly evolving industry. Since medical cannabis was legalized in Canada in 2001, there have been three major regulatory framework overhauls. It is highly likely that further regulatory changes are forthcoming regarding both medicinal and recreational usage. With a changing regulatory environment, Valens and the other companies licensed under the Cannabis Act continue to face some amount of regulatory risk at the federal and provincial levels of government, which may impact the operations of the Company either directly or indirectly. In the event of legislation that is unfavorable to the Company, its ability to meet our forecasts may be negatively impacted. We caution potential investors to carefully separate recreational use regulations from legislation that regulates the medical industry.
Growth Profile may differ from Expectations: Given the nascent level of the industry and the
sizeable expectations put forth by the market, there is a risk that industry and company growth may not materialize as expected, to the detriment of the Company’s earnings potential and valuation. We note that recreational cannabis, which we expect to account for the majority of Valens’ business, was only legalized in October of 2018, and therefore, the market has no track record from which to base any future growth forecasts.
Research on Phytocannabinoids: While a number of scientific studies have demonstrated the efficacy
of medicinal cannabis for a vast array of indications, few clinical trials to assess the impacts on
humans have been completed (due to the prohibition.) It is possible that further research
could prove the benefits of medical cannabis to be less than what the industry currently
believes. This could potentially adversely impact consumer perception regarding the safety and
efficacy of cannabis and cannabis based products.
Litigation and Recall: We believe that all pharmaceutical and related companies face elevated
levels of litigation risk. Any adverse event that leads to litigation against Valens by customers,
including class action, could have a material impact on the Company.
Competition: There are currently 142 licenses issued for cultivation, processing and sale of
cannabis under the Cannabis Act, and several hundred applications in progress. With more players
entering the industry, the Company’s profitability could be threatened.
Operational Risk: The business of growing cannabis exposes the Company to all the inherent
risks of agriculture. The completion of the Company’s cultivation assets, which is planned to
supply product in order for the Company to use in their production of branded products, may also be
delayed due to changes in the construction timeline, or longer than expected wait times for Health
Canada licensing of the asset to begin operations and sales.
Financing Risk: Although we do not model the need for a capital raise, is possible that the Company
needs to access the capital markets to raise funds to finance future plans. In the event that
market or Company conditions deteriorate, and they cannot access further capital, it may hamper
their ability to execute their plans, and could negatively affect their earnings potential and
valuation.
Disclosure Requirements
VGW
Rating:
12 Month Target:
C$3.09
Outperform C$7.00
1 Is this an issuer related or industry related publication?
Issuer
2 Does the analyst, a member of the analyst's household, associate or employee who prepared
this research N report hold or are short on any of the issuer's securities directly or
through derivatives? If yes, state name and
the nature of the interest:
3 Is AltaCorp Capital making a market in an equity or equity related security of the issuer?
N
4 Does AltaCorp Capital and its affiliates collectively beneficially own more than 1% of any
class of common N equity of the issuer?
5 Does AltaCorp Capital or the analyst have any actual material conflicts of interest with the
issuer? If yes, please N explain:
6 Does any director, officer, employee of AltaCorp Capital or member of their household serve
as a director or N officer or advisory capacity of the issuer? If yes, state name:
7 Did the analyst and/or associate who prepared this research report receive compensation based
solely upon N investment banking revenues?
8 Did the analyst receive any payment or reimbursement of travel expenses by the issuer?
N
9 Has the analyst received any compensation based on a specific investment banking transaction
relative to this N issuer?
10 Has any director, officer or employee who prepared this research report received any
compensation from the N subject company in the past 12 months?
11 Has AltaCorp Capital provided the issuer or its predecessor with non-investment banking
securities-related Y services in the past 12 months?
12 Has AltaCorp Capital managed or co-managed an offering of securities by the issuer or its
predecessor in the Y past 12 months?
13 Has AltaCorp Capital received compensation for investment banking and related services from
the issuer or its Y predecessor in the 12 months prior to the date of this report?
14 Has an analyst conducted a site visit within the past 90 days?
Y
Ranking Distribution
% IB
Clients
Outperform 39% 18%
Sector Perform 12% 0%
Underperform 6% 0%
Speculative Buy 2% 0%
Restricted 1% 50%
Not Rated 39% 4%
Tender 0% 0%
Total 100% 9%
Rating System
AltaCorp's rating system reflects our outlook for expected performance of an issuer's equity
securities relative to its peer group over the next 12 months.
An Outperform (Buy) rating represents a security expected to provide a return greater than the peer
group average.
A Sector Perform (Hold) rating represents a security
expected to provide a return in line with the peer group average.
An Underperform (Sell) rating represents a security
expected to provide a return less than the peer group average.
A Speculative Buy rating represents a security where the return potential is high, but the risk of
a significant loss is material.
Rating and Price Target History for: Valens GroWorks Corp. (VGW@CN) as of 03-13-2019
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Q1 Q2 Q3 2017 Q1 Q2 Q3 2018
Q1 Q2 Q3 2019
01/08/19
I:OP:$5.00
Created by: BlueMatrix
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www.altacorpcapital.com
The Analyst that prepared this report may not be subject to U.S. rules with regard to the
preparation of research reports and the independence of analysts.
The information contained herein is for information purposes only and is not to be construed as an
offer or solicitation for the sale or purchase of securities. While the accuracy or completeness of
the information contained in this document cannot be guaranteed by AltaCorp Capital Inc., it was
obtained from sources believed to be reliable. AltaCorp Capital Inc. and/or its officers, directors
and employees may from time to time acquire, hold or sell positions in the securities mentioned
herein as principal or agent.
The author of this report hereby certifies that the views expressed in this report accurately
reflect his/her personal views about the subject security and issuer. The author of this report
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related to the specific recommendations or views contained in this research report.
AltaCorp Capital Inc. may receive or intends to seek compensation for investment banking services
from all issuers under research coverage within the next three months.
This report has not been approved by AltaCorp Capital Inc. for the purposes of section 21 of the
Financial Services and Markets Act 2000 as it is being distributed only to persons who are
investment professionals within the meaning of article 19 of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 and is not intended to, and should not be relied upon, by any
other person.
AltaCorp Capital (USA) Inc. has taken reasonable steps regarding the accuracy of key statements in
this report and accepts responsibility for the content in this research report.
U.S. Institutions interested in
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