Village Farms International has 133% upside: Beacon Securities

Following the company’s second quarter results, Beacon Securities remains upbeat about Village Farms International (TSX:VFF).

On Tuesday, Village Farms reported its Q2, 2018 results. The company lost (US) $2.28-million on sales of $42.0-million, a topline that was down eight per cent from the same period last year.

“Less than 12 months after submitting its application for a cultivation licence, Pure Sunfarms is growing, harvesting and now selling high-quality cannabis, as demand for product increases ahead of imminent adult-use legalization on Oct. 17,” CEO Michael DeGiglio said. “Pure Sunfarms has completed multiple harvests, and both quality and yield are exceeding expectations. The Delta 3 greenhouse, optimized for efficient, continual year-round production, is operating as designed. Every day, the operation is benefiting from the deep experience of the growing team, the existing skilled labour force, and the specific knowledge and advantage that comes with having operated this large-scale greenhouse for two decades. With each new flower room planted out, with each harvest, I am more confident in Pure Sunfarms’ ability to become a premier, vertically integrated supplier to the Canadian cannabis market, with the advantage of being the low-cost producer. Pure Sunfarms is [firmly on] track to begin generating positive cash flow for Village Farms as early as the first quarter of 2019. We are proud to be able to drive what we believe will be meaningful, long-term value for our shareholders with minimal capital investment, minimal dilution, and using only our existing internal management team and staff at Village Farms to support our investment.”

Beacon analysts Doug Cooper and David Kideckel say the company’s results were in-line with their expectations. But the pair say the fact that that VFF made its first sales seems to have gone unnoticed, and they regard this a development that should be considered a major inflection point in the company’s history.

“Now that this sales threshold has been crossed (apparently un-noticed by the broader investment community given the stock is down ~38% from its June high of $8.00), we expect a quick ramp as the company both converts the rest of D3 and starts selling in size,” the analysts say. “Aside from Emerald Health with whom it signed a supply agreement in April, VFF indicated that PSF is engaged in supply conversations with multiple LPs. While such wholesale agreements could clearly yield significant margins as noted above in its first sales, PSF is also close to announcing a new President who could transition the company into a vertically integrated vehicle directly selling branded product itself (as it has done for years with tomatoes and peppers). Ultimately, we believe being the Canadian low cost producer will provide PSF (and VFF) with multiple opportunities either as a wholesaler or vertically-integrated CPG.”

In a research update to clients today, Cooper and Kideckel maintained their “Buy” rating and one-year price target of $12.00 on Village Farms, implying a return of 133 per cent at the time of publication.

The analysts think VFF will post Adjusted EBITDA of $3.3-million on a revenue of $195-million in fiscal 2018. The expect those numbers will improve to EBITDA of $28.9-million on a topline of $245-million the following year.