Valens: Canaccord Cuts Price Target To $4.00 Due To Tapered Growth

On July 13, The Valens Company Inc. (TSX: VLNS) reported its second quarter financial results for the period ending May 31. The company said it grew revenue 3.5% sequentially to $24 million.

For the segments, the company saw its Canadian recreational sales drop by 15% to $9.8 million, while their Green Roads acquisition saw its revenue grow 12% to $5.7 million. The company’s B2B sales grew 11% to $7 million, while its international sales grew 175% to $1.1 million.

Adjusted gross profits were $3.4 million or 14% of revenues, which is flat sequentially. The company says, “Despite flat adjusted gross profit in the quarter, we implemented numerous initiatives during Q2 2022 which position Valens for improvement in adjusted gross margin in coming quarters.”

The company reported adjusted EBITDA margins of ($15.9) million, slightly better sequentially, for which the company says the improvement was attributed to lower selling, general and administrative costs.

Lastly, the company said it wants to end 2022 as a top five player in vapes, edibles, and beverages and a top ten player in flowers, while they want to reduce cash burn “through improvements in adjusted EBITDA, working capital management and monetization of non-core assets.”

They also provided full-year 2023 guidance of a minimum of C$225 million in revenue with adjusted EBITDA margins of better than 10%.

There are currently 7 analysts covering Valens with an average 12-month price target of C$3.86, or an upside of 376%. Out of the 7 analysts, 1 has a strong buy rating, 4 have buy ratings, 1 analyst has a hold rating, and the last analyst has a sell rating on the stock. The street high price target sits at C$9.75, which represents an upside of over 1,000%.

In Canaccord Genuity Capital Markets’ note on the results, they reiterate their speculative buy rating but slash their 12-month price target from C$6.75 to C$4.00, saying that the company’s “Slower adult-use sales lead to tapered growth.”

On the results, Canaccord was expecting revenues of $27.4 million. The miss was attributed to weaker adult-use sales, which Canaccord says, “the company witnessed absent depletion weeks through its product rebranding from Verse to Versus.” Though even with a decline in adult use sales, Valens said they actually increased their market share to 3.2%, from 2.8% last quarter.

Though the lost revenue was recouped from Valens’ other segments, Canaccord says that DTC e-commerce drove most of Valens Green Roads’ revenue increase. While the increase in international sales came from higher demand in Australia.

For gross margins, the company’s margin of $3.3 million was below the $5.8 million Canaccord was forecasting. However, Canaccord believes that the inventory write-downs affected the miss more than the actual results. The company also wrote off C$52.9 million in goodwill, C$67.9 million in intangibles, C$4.1 million in prepaid deposits, C$2.8 million on assets held for sale, and C$13.9 million in inventory.

Canaccord expects Valens to see a better cost structure and higher profitability going into the second half of the year, “as the company is set to benefit from a host of cost improvement initiatives enacted in the last five months.”

Below you can see Canaccord’s updated full-year 2023 estimates.

Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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