Cannabis ramp-up for Village Farms is going smoothly, Echelon Wealth says

BC-based Village Farms International (Village Farms Stock Quote, Chart, News: TSX:VFF) has its cannabis expansion plans proceeding very smoothly, says Russell Stanley, analyst with Echelon Wealth Partners. In a client update on Monday, Stanley reiterated his “Speculative Buy” rating and 12-month target price of $13.00 for VFF.

Village Farms released its year-end 2017 financial results on Monday, with the results solely reflecting the company’s existing produce business as one of the largest growers of greenhouse tomatoes in North America. But the release included an update on the progress of its Pure Sunfarms 50/50 joint venture with cannabis company Emerald Health Therapeutics (TSXV:EMH).

“Since announcing our entry into the Canadian cannabis industry last June, the Pure Sunfarms joint venture has consistently executed on all facets of its plan, culminating with Health Canada’s issuance of the cultivation license for Pure Sunfarms’ 1.1 million ft. sq. Delta 3 greenhouse earlier this month,” said Michael DeGiglio, CEO of Village Farms in a press release. “Village Farms is always focused on maximizing the return from our assets and with conversion of the first quadrant of the Delta 3 greenhouse nearing completion, Village Farms has modelled and proposed a strategy to significantly and accretively accelerate the production ramp-up plan for Delta 3, which Pure Sunfarms is now pursuing.”

Stanley says the “very smooth” progress on its cannabis ramp-up combined with VFF’s recent share price weakness constitutes a buying opportunity for investors.

“Our estimate revisions are very minor at this point. We continue to assume that the joint venture can finance conversion of the first three quadrants of the Delta 3 facility, though full conversion may be possible,” says the analyst. “Conversion of the first three quadrants implies annualized cultivation capacity of 56,250kg, and our model assumes that VFF operates at a very reasonable 75 per cent of that capacity. That capacity estimate assumes very conservative yields of 68 grams/square foot of facility footprint versus the average amongst comparable greenhouse projects of 94 grams/square foot.”

The analyst says that VFF trades at 6.3x his EV/2019 EBITDA estimate, which is low compared to its closest peers in the sub-$1 billion market cap category at 10.5x and versus the broader peer group adjusted average of 16.3x, thus representing a “steep discount” of 40 per cent and 62 per cent, respectively.

Stanley’s $13.00 target represents a projected return of 155 per cent as of publication date.