Village Farms is trading at a major discount to its cannabis peers, Echelon Wealth says

Greenhouse grower Village Farms International (TSX:VFF) may not be a cannabis space household name like Canopy Growth and Aurora Cannabis, but the BC-based company should be getting more respect based on its proven crop-growing chops, says Russell Stanley of Echelon Wealth Partners.

In a research report on Tuesday, the analyst maintained his “Speculative Buy” rating and C$13.00 target price for VFF, representing a projected return of 123 per cent.

On Monday, Village Farms announced its first quarter ended March 31, 2018, financials, which included sales of $29.5 million, a decrease of six per cent from the same quarter last year (all figures in US dollars unless noted otherwise). The quarter saw the completion of the initial cannabis harvest at the company’s Pure Sunfarms Delta 3 greenhouse, a 50/50 joint venture with licensed producer Emerald Health.

“The start today of commercial-scale cannabis production at the Delta 3 facility is the most significant milestone for Pure Sunfarms to date,” said Michael DeGiglio, CEO, in a press release. “And we are thrilled to definitively move forward with the accelerated production plan, which significantly increases Pure Sunfarms conservative production targets to as much as 60,000 kilograms or more of dried cannabis through the end of 2019. This accelerated plan will enable Pure Sunfarms to more fully capitalize on the expected near-term shortfall of supply when adult use of cannabis is legalized in Canada.”

Stanley says that the company’s Q1 came in below his forecasts (revenue and EBITDA of $29.5 million and $1.8 million, respectively, compared to the analyst’s $33.8 million and $3.3 million, respectively), but that the noted progress on the Pure Sunfarms JV is the bigger story.

“In terms of Pure Sunfarms, the cannabis JV, management reiterated production targets 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,” he says.

“VFF trades at 7.4x EV/C2019E EBITDA based on our estimates, a 53 per cent discount to the 15.7x adjusted average multiple at which its closest peers trade, and 28 per cent below the 10.2x adjusted average at which the broad peer group trades at,” says the analyst.

Stanley expects VFF to generate Adj. EBITDA in 2018 of $4.9 million on a topline of $164.3 million and Adj. EBITDA in 2019 of $31.9 million with revenues of $177.2 million.

Disclosure: Jayson MacLean owns shares of Village Farms International.