The cannabis company has the extraction capacity to enable its clients to be the first movers in the high margin extraction market segment, noted Mackie analysts

Mackie Research Corporation boosted its price target on Valens GroWorks Corp ( ) (OTCMKTS:VGWCF) and maintained its Buy rating after the cannabis company posted strong 1Q financial results on Thursday.

Analysts at Mackie set a new target price of C$6.75 a share, up from $6.

Valens reported that its 1Q revenue increased to C$2.2 million compared with nothing in the same period in fiscal 2018. As a result, gross profit increased to C$850,525 for the first quarter.

Revenue for the period came in higher than Mackie’s estimate of C$1.8 million.

“Valens has the extraction capacity to enable its clients to be first movers in this high margin market segment and as a result, we believe its services will be highly sought after through our forecast periods,” analysts Greg McLeish and Nicola McFadden wrote in a note.

Kelowna-based Valens is a multi-licensed provider of cannabis products and its services are focused on various proprietary extraction methodologies, distillation, cannabinoid isolation and purification, as well as associated quality testing. Valens has extraction processing and supply agreements with a number of leading producers across Canada.

HEXO agreement

The cannabis company also announced Thursday that it has signed a multi-year extraction services agreement to provide cannabis and hemp extraction services to HEXO Corp ( ) (NYSEAMERICAN:HEXO), a leading cannabis producer and consumer goods cannabis company.

The agreement has an initial two-year term from the date of the first shipment, with HEXO supplying Valens with an annual minimum of 30,000 kilograms in the first year and 50,000 kilograms of cannabis and hemp biomass in the second year.

Mackie’s analysts also noted the impending legalization of cannabis edibles in Canada as a major catalyst that could contribute to Valens’ bottom line.

“If the Canadian market follows some of the trends seen in US states where recreational cannabis is legal, such as Colorado and Oregon, products derived from cannabis oils should become a large and growing segment of the market,” noted the analysts.

According to market data, flower sales in both states dominated upon legalization, but saw a rapid decline and a subsequent increase in concentrate market share in 2018. Mackie’s analysts forecast a similar increase in demand in Canada for derivative products.

“The efficient extraction of cannabis requires specific experience, knowledge and equipment to avoid processing errors,” noted the analysts. “We believe it will be advantageous for cultivators in Canada and abroad to partner with experienced extractors such as Valens to achieve the best derivative cannabis products from their harvest.”

Financial forecast

Mackie also updated its financial forecast for the company, calling for earnings of C$4.3 million or $0.04 per share in full year 2019.

It set the company’s full year revenue estimate at C$39 million.

Shares of Valens jumped 9% in Canada to C$4.35 on Thursday afternoon, and 8.3% in the US to sit at US$3.22.

Contact Angela at angela@proactiveinvestors.com

Follow her on @AHarmantas