Stifel GMP has resumed a “Buy” rating and raised its target price for The Valens Company Inc (TSE:VLNS) (OTCQX:VLNCF) (FRA:7LV) a day after the company closed its acquisition of Green Roads to gain a major foothold in the US CBD market.
The broker’s analysts also noted that Valens is flush with a C$70 million capital runway after recently raising C$46 million in financing. It also cited the launch of Valens’ first flower products that are aggressively priced in Canada.
“In short, VLNS has executed on what management has promised, proving its suitable comps are with Tier 1 LPs, in our view,” the Stifel analysts said, raising their price target to C$5.75 a share from C$3.75.
READ: Valens closes C$46M private placement for North American and international expansion
Overall, they noted, buying Green Roads gives Valens direct entry into the US market with a trusted and leading CBD health and wellness brand, an established manufacturing and distribution platform with a global reach, highly experienced leadership team with a strong knowledge of the US consumer landscape. and a proven track record in cannabis consumer packaged goods manufacturing.
Valens will pay US$40 million for Green Roads, plus up to an additional US$20 million in contingent consideration payable upon the purchased business achieving certain profit milestones. If all the milestones are met, the transaction represents around 4.5x 2022 earnings before interest, tax, depreciation, and amortization (EBITDA).
“We see a slew of revenue and cost synergies to drive growth in both cannabis and CBD verticals, with the latter likely to have significant growth in 2021/2022,” the analysts wrote.
They noted that Green Roads could help Valens’ cannabis operations in Canada by expanding the product portfolio with its sophisticated online marketing engine that boasts a double-digit return on customer acquisition costs upon first purchase.
On the CBD side, the analysts pointed to Valens’ ability to leverage its deep industry network to secure lower-cost hemp biomass, which would help expand Green Roads’ gross margin.
“At the same time, VLNS could open new retail doors to GR with US cannabis operators, existing international customers (11 countries collectively incl. late-stage discussions in Latin America, Asia-Pacific & Europe) and potentially break into a new revenue stream through third-party manufacturing, in our view,” they said.
In addition, the analysts noted that Valens is expanding its Canadian product offerings and geographical distribution.
“VLNS introduced one of the industry’s first baked goods and the company’s first flower product targeting the large format, value segment,” they pointed out. “As we had expected, the LP leveraged the immense oversupply in the market to secure ultra-low cost product and has priced its flower offering at ~$2.70/gram retail, representing the lowest price point in the industry and 25-35% below most peers. We believe this could drive significant market share capture and showcases the company’s differentiated and attractive operating profile.”
Valens’ stock traded at around C$3.16 a share in Toronto and around US$2.56 in New York on Tuesday morning.
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