Village Farms International’s (TSX:VFF) “impressive” ramp-up into the cannabis-growing business is deserving of a price target increase, says analyst Russell Stanley of Echelon Wealth, who in a note to clients on Monday maintains his “Speculative Buy” but raised his one-year price target to $13.00 from $8.75, implying a return of 64 per cent at the time of publication.
On Monday, Village Farms announced that it has received its cannabis cultivation license from Health Canada for its joint venture with medical cannabis company Emerald Health Therapeutics and that it expects to obtain a sales license by July 1.
One of the largest producers of premium quality greenhouse tomatoes in North America, Village Farms is converting a 1.1 million sq/ft facility to growing marijuana, saying that with Emerald, the Delta, BC, greenhouse will produce 75,000 kg of cannabis annually.
“Growing any agricultural crop on a large scale and repeatedly delivering expected quantities and consistent quality, with full regulatory compliance, at a competitive price is an extremely challenging proposition for even the most experienced agricultural producers. The goal is for the Joint Venture to set the standard in this regard in the Canadian cannabis industry and establish itself as a preferred supplier for both the short- and long-terms,” said Michael DeGiglio, CEO, Village Farms International in a press release.
Stanley says that getting a sales license by July 1 would be a very fast turnaround for the company.
“Village Farms first announced its JV plans with Emerald in June 2017, so we view the short time-to- license as very impressive, and a validation of Emerald Health as a strong partner for Village Farms,” says the analyst.
“We had previously reflected only the first quadrant of the Delta 3 conversion in our model, leading to annualized capacity of 18,750kg. We now assume that the JV will be able to internally fund the conversion of the first three quadrants, taking annualized capacity to 56,250kg,” says the analyst.
Stanley says the ramp up supports his volume production/sales estimates while at the same time reducing his realized pricing assumption to $400 per gram from $5.00 per gram to more conservatively reflect wholesale pricing levels. The changes provoke a boost in EBITDA estimate for the company, with the analyst predicting F2019 EBITDA of $33.5 million USD (up from $24.8 million USD).
“We are therefore increasing our valuation multiple from 13.5x to 14.5x EV/2019E EBITDA. We view this as a very conservative multiple, given that the peer group adjusted average was 15.4x at the end of last week. The increase in multiple adds another C$1.00/shr to our valuation,” says Stanley.