A management upgrade at the company’s cannabis operations launches Village Farms International’s (TSX:VFF Quote, Chart) Pure Sunfarms venture into top tier status among Canada’s licensed producers, says Doug Cooper, analyst with Beacon Securities. Based on the development, Cooper has raised his target price for VFF from $12.00 to $13.50 while maintaining his “Buy” recommendation.
On Tuesday, Village Farms announced the appointment of Mandesh Dosanjh as President and CEO of Pure Sunfarms, its joint venture owned 50/50 with Emerald Health Therapeutics (TSXV:EMH). Dosanjh comes from his role served over the past two years as senior vice president, supply chain and wholesale at the Liquor Control Board of Ontario (LCBO).
Cooper notes that Dosanjh was also a member of the LCBO’s executive steering committee for cannabis, which, before the Ontario government redirected towards a privatized retail model, was setting up to be the world’s single largest buyer of cannabis.
“The appointment of Mr. Dosanjh marries the two most important aspects of the business,” says Cooper in a client update on Thursday. “The current management team of VFF has, without a doubt, the greatest experience in terms of agricultural growing. VFF also has experience in branding, packaging and selling produce through retail channels. The addition of Mr. Dosanjh further builds on this experience and brings significant logistics expertise and undoubtedly brings relationships with other government liquor agencies who, if not directly selling to the consumer, will act as the wholesale distributor (ie. Ontario, Alberta, BC).”
Cooper believes Dosanjh’s appointment could also signal a change in strategy for Pure Sunfarms from operating solely as a wholesaler to a vertically integrated producer with branding and retail channels.
“While the shares of VFF have had a good move from the $5 level, we believe they are incredibly undervalued, especially in comparison to other Canadian LP’s,” says the analyst. “To put it in perspective, VFF trades at a market cap per sq. ft. of production of $247 based solely on the 1.1 million sq. ft. at [Pure Sunfarms’ Delta 3 greenhouse]. Even assuming VFF only accrues 50 per cent of that value, that is ~$500 pro-forma. This compares to ~$2,800/sq. ft. for Aurora Cannabis and Aphria and $1,900 for CannTrust.”
Cooper thinks Village Farms will generate Adjusted EBITDA in fiscal 2018 of $3.3 million on revenue of $195.0 million and Adjusted EBITDA in fiscal 2019 of $28.9 million on a topline of $245.0 million. His $13.50 target stems from 15x his fiscal 2020 EBITDA forecast of $41.4 million and represents a projected 12-month return of 119 per cent.
Disclosure: Jayson MacLean owns shares of Village Farms International.