Stifel Nicolaus Canada analysts resumed coverage on The Valens Company Inc (TSX:VLNS) (OTCQX:VLNCF) (FRA:7LV), increasing its target price to $3.35 per share from $3.25 following the company’s recent equity financing and LYF Food Technologies Inc acquisition.
“We believe (LYF) is an accretive tuck-in that positions the company with a stronger operational footprint to support its Cannabis 2.0 strategy,” the analysts said.
They added: “Matched with an already increasing market share in Canada's REC market; further catalysts in FY21 to improve its product portfolio, capacity and operational efficiency and recent inventory-related misstep being a temporary and transient headwind, we believe the recent selloff in VLNS shares appears overdone.”
READ: Valens scales up and begins to show what it was 'made to do'
Stifel reiterated a Buy rating on the stock, which was trading flat at C$1.78 on Monday afternoon.
The analysts wrote that they expect the company’s LYF Food Technologies acquisition could accelerate its edible strategy while its GTA facility is still pending licensing and focuses on beverage production while also centralizing distribution.
“As a result, the increased portfolio of 100+ recipes could be a catalyst to expand the edible market share from the ~6% share currently to the ~20% share seen in mature US states, offering a robust opportunity for sales generation, in our view,” the Stifel analysts said.
They noted that Valens appears to have strong momentum in the recreational cannabis channel recently, with its market share across Cannabis 2.0 products increasing an estimated ~200 basis points QoQ in 4Q FY2020 according to Headset, driven largely by the vape segment as the company introduced new products with brand partners and ahead of its K2 facility coming online late November, alleviating production capacity constraints.
Other FY2021 catalysts for Valens that the analysts believe could sustain the company’s positive momentum and reignite margin expansion include: leveraging spot market raw material purchases to lower input pricing; LYF's positive contribution to results in 2Q FY2021 and; its GTA facility coming online mid-FY2021, further optimizing operations and increasing product offerings.
They added that Valens management has been pointing to an eventual US market penetration, which the analysts believe could likely be strategically focused on CBD as those assets could be converted relatively quickly for THC opportunities under a regulatory reform scenario.
In addition, they expect Valens to focus M&A efforts on accretive transactions similar to LYF, bolstering the company’s profitability profile.
The Stifel Nicolaus analysts concluded that Valens stock price at current levels represents an “appealing risk-reward opportunity,” given the company’s strong balance sheet to support operations and further M&A opportunities.
Contact Sean at sean@proactiveinvestors.com