With its well-proven chops in growing greenhouse tomatoes and other produce, BC-based Village Farms International (TSX:VFF) is a good bet to succeed in the cannabis market as well says analyst Russell Stanley of Echelon Wealth Partners.
In a research update to clients on Monday, Stanley maintains his “Speculative Buy” rating and $13.00 target price for VFF.
On Monday, Village Farms announced it has entered a supply agreement as part of its joint venture with licensed cannabis producer Emerald Health Therapeutics (TSXV:EMH), under which Emerald agrees to purchase 40 per cent of the JV’s production volumes in 2018 and 2019 at a pre-determined price.
Stanley views the agreement positively, saying that it gives the joint venture sales and revenue visibility while at the same time providing flexibility to VFF to pursue sales opportunities with provincial governments and other LPs.
“While the price per gram has not yet been disclosed, our model assumes VFF realizes $4.00/gram on dried flower sales,” says the analyst. “Management believes this agreement will cover 21,000–24,000kg, based on their production estimates of 7,000–8,000kg in 2018 (versus our estimate of just under 4,000kg) and 46,000–52,000kg in 2019 (versus our estimate of just over 30,200kg).”
“We note that our estimates are very conservative relative to management’s, and given VFF’s long track record in cost-effective greenhouse production, we believe there is considerable room for upward revisions to our forecast. In fact, the supply agreement effectively locks up a buyer for 75 per cent of our F2018 production estimate, and 65 per cent of our F2019 estimate,” he says.
Stanley estimates that at 5.6x EV/C2019E EBITDA, VFF trades at the lowest multiple of its peer group of cannabis companies, representing a 41 per cent discount to the 10.0x adjusted average multiple of its closest peers and a 59 per cent discount to the 13.1x adjusted average of the broader peer group.
The analyst’s target price of $13.00 represents a projected return of 175 per cent at the time of publication.