Tomato grower turned cannabis player Village Farms is a buy, Beacon Securities says

Beacon Securities analyst Vahan Ajamian is bullish on vegetable grower turned pot player Village Farms (TSX:VFF).

In a research report to clients Thursday, Ajamian initiated coverage of Village Farms with a “Buy” rating and a one-year price target of $11.00, implying a return of 43 per cent at the time of publication.

B.C.-based Village Farms made its name as one of the largest growers of premium produce in North America, and is particularly known for growing tomatoes in Texas and in Delta, a suburb of Vancouver.

But on June 6 of last year, the company announced that it would partner with Emerald Health Therapeutics to covert a more than million square-foot greenhouse from growing tomatoes to cannabis. An option to convert another 3.7-million square-feet hints at the possibilities for the partnership.

Ajamian says Village Farms’s history gives it a natural leg-up on the competition.

“We expect that all companies will undergo a period of ramping up (including Village Farms transitioning to cannabis),” the analyst says. “However, we believe execution risk is lower for Village Farms than for most of its peers as: its master grower team has 750 years of experience growing a variety of crops – including in this greenhouse specifically; it has proven an ability to grow at scale, at a low cost, and sell to large complex organizations (Costco, Walmart, Loblaws etc.); and it can leverage Emerald’s cannabis strains/expertise. Should cannabis pricing ultimately commoditize, we believe Village Farms will be among the best positioned by running a low cost operation.”

Ajamian thinks Village Farms will generate EBITDA of (U.S.) $6.3-million on revenue of $153.9-million in fiscal 2017. He expects those numbers will become EBITDA of $7.5-million on a topline of $143.6-million the following year.

“With a market cap of just C$323MM, Village Farms pales in comparison to its peers,” Ajamian adds. “It has a tight share structure with high insider and institutional ownership. Even after applying what we consider to be very conservative forecasts, we see compelling value at current levels –and we believe licensing could be imminent and act as a catalyst to its share price.”