According to Martin Landry of GMP Securities, Valens GroWorks (Valens GroWorks Stock Quote, Chart CSE:VGW) is a highly discounted stock which is likely to see a narrowing of that gap based on the company’s rosy growth prospects. On Tuesday, Landry initiated coverage of Valens with a “Buy” rating and $8.00 target, representing a projected return of 141.0 per cent at the time of publication.

An extraction and product development company, Valens began in 2014 and uses proprietary techniques to extract cannabinoids like THC and CBD from dried cannabis flower and hemp and sells its extracts to Canadian licensed producers. The company received its cultivation and processing licenses in October 2018.

Landry says it’s still early innings for the cannabis extraction business, where extract products could ultimately make up half of the mature cannabis market.

“The extraction industry is poised to experience rapid growth with the arrival of vape pens, beverages and edibles this fall. Value-added products derived from cannabis extracts could represent 50 per cent of the cannabis industry sales in Canada over time. Hence, Valens presents investors with an opportunity to gain exposure to a rapidly growing industry very early in its development cycle,” says Landry.

The analyst thinks Valens is at a hefty discount to its peers, estimating that VGW trades at 4.9x his calendar 2020 EBITDA estimate versus the cannabis sector which trades at about 20x calendar 2020 EBITDA.

“The valuation discount can be explained by Valens’ limited track record given it is still in a pre-revenue stage. However, we expect to see a valuation re-rating as the company executes on its growth strategy and as investors become more familiar with extraction companies,” Landry says.

The analyst expects Valens to generate 2019 revenue and EBITDA of $51.3 million and $18.6 million, respectively, and 2020 revenue and EBITDA of $137.3 million and $63.1 million, respectively.

Landry says upcoming catalysts for Valens include further clarity on the ramp up in dried cannabis supply from Valens’ tolling partners (expected during Q2 2019), an announcement of a white labeling agreement with a branded partner, particularly in the vape pen and beverage categories (expected mid-2019) and European Union Good Manufacturing Practice certification for its Kelowna facility (expected during the second half of 2019).