POSITIONED TO BE A LEADER IN THE EXTRACTION SERVICES MARKET





INVESTMENT BRIEF

We believe Valens GroWorks is well-positioned to be a leader in the extraction services market. The Company has significant current production capacity that is expanding towards 150,000 kg annually. Not only is the Company set-up for extraction processing into crude oil, it also has the ability to further refine these extracted products for various oil derivative products that are expected to be approved for the market later this year. We are of the opinion that the extraction services market and development of oil derivative based products will become an important aspect of the cannabis landscape. Valens’ primary driver of revenues will be toll processing in the near-term, followed by expanding to white-label products and its own branded products towards the end of 2019. As the market evolves towards consumer-packaged goods (CPGs) we view extraction services as a key aspect of the marketplace.

KEY HIGHLIGHTS

Solid Economics for Extraction Services: We forecast solid margins through VGW’s extraction services as the Company leverages the relatively low capital investment required for its extraction machines. The low operating costs enable high gross margins with limited operating costs for sales and marketing. Our estimates result in EBITDA margins in the high 40% range.

Agreements in Place Driving Near-Term Sales: To date Valens has announced a number of key agreements for its services with both public and private LP’s that will drive meaningful revenue growth in the near-term. We believe that management is in active discussion on further agreements and, as it demonstrates success, it will validate the model and lead to further agreements in the future.

Strategic Partnerships to Support Growth: Valens has entered into a variety of partnerships and extraction contracts to date. The partnerships are for proprietary formulas, research collaborations, and shelf space in retail and online sales channels. We believe that with these partnerships and the current and future extraction agreements signed that the Company is positioned well for growth.

OUTLOOK

We are initiating coverage on Valens GroWorks with a Buy recommendation and target price of $5.25. In our opinion, the Company is poised to be a leader in the extraction services sector. As we have seen in other geographies, consumer demand for oil derivative products accounts for ~50% of the market, with better price stabilization than dried flower sales. As a result, we are of the view that extracted cannabis and value-add products will be in demand over the next couple of years.

RECOMMENDED ACTION

We view Valens as an attractive investment in the cannabis sector as the market evolves towards extracted product and consumer products. We believe the shares of Valens GroWorks are undervalued trading at 5.0x F2020 consensus EV/EBITDA.



VALUATION We apply a 9x EV/EBITDA multiple to our F2020 EBITDA estimate, then discounted by 15%. The average of other cannabis companies trade in the 15-20x range on 2020 EV/EBITDA. CATALYSTS Ongoing – New extraction services agreements

New extraction services agreements Late March – Q4/18 financial results

All above written content by Haywood Securities Inc.