Ahead of the company’s second quarter results, GMP Securities analyst Ryan Macdonell is maintaining his “Buy” rating on Valens GroWorks (Valens GroWorks News, Stock Quote, Chart TSXV:VGW).

On July 15, VGW will report its Q2, 2019 results. Macdonell today increased his revenue expectation for the quarter from $6.4-million to $7.0-million, a move he says is driven by strong demand for the company’s services, including a deal with Tilray that has expanded considerably. He says he expects these results will growth and the margin potential of tolling, a process by which extraction companies are paid a flat fee per gram to take a grower’s flower.

“Our Q2 forecasts call for 7.9 tonnes of tolling at an average price of $0.89/g, compared to 1.8 tonnes at a price of $1.20/g in Q1,” the analyst says. “We view this as achievable given that Valens indicated that it had already processed ~5 tonnes in the first 55 days of Q2. Our estimates for volume growth drive a 216% QoQ increase in revenue for Q2 and a 137% QoQ increase in revenue for Q3. This makes Valens one of the only cannabis companies under coverage forecasted to post QoQ revenue growth in the triple digits for two quarters in CY19. Furthermore, we expect gross margin to improve by nearly 1800bps QoQ to 56% as volumes scale and COGS are not impacted by purchases of raw cannabis biomass as they were in Q1.”

In a research update to clients today, Macdonell maintained his “Buy” rating and one-year price target of $10.00 on Valen GroWorks, implying a return of 155.8 per cent at the time of publication.

The analyst thinks VGW will post EBITDA of $13.9-million on revenue of $51.8-million in fiscal 2019. He expects those numbers will improve to EBITDA of $77.3-million on a topline of $181.9-million the following year.

“VGW trades at ~5x our CY20 EBITDA forecast vs LPs which trade at ~20x,” the analyst adds. “In our view, this valuation gap could narrow following the company’s quarterly report. We derive our $10.00 target price using a 15x multiple applied to our CY20 EBITDA estimate. In our view, Valens deserves such a multiple given the company’s strong growth prospects, high profitability levels and significant readiness for the upcoming extract products market.”

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