Village Farms is set to benefit from the cannabis shortage, GMP says

A company that used to me known for produce may be able to produce enough cannabis to put a dent in the current supply glut, GMP Securities analyst Martin Landry says.

On Monday, Village Farms International (Village Farms Stock Quote, Chart: TSX:VFF) reported its Q3, 2018 results. The company lost (US) $1.98-million on revenue of $39.7-million, a topline that was down 11 per cent over the same period last year.

“Our cannabis joint venture in Canada, Pure Sunfarms, continues to steadily ramp production and remains firmly on track to achieve a full annual production run rate of 75,000 kilograms in the first half of next year,” CEO Michael DeGiglio said. “The Pure Sunfarms operation is producing quality, multiple strains with yields in line with our expectations. There is tremendous interest from provincial boards and other licensed producers for its product. As was expected, the Canadian cannabis market is well short of supply and Pure Sunfarms will be taking advantage of the favourable resulting spot market. At the same time, Pure Sunfarms is building inventory to ensure a consistent supply under its own brand directly to provincial boards, to whom it expects to begin shipping in the coming weeks.”

Landry says this quarter was a bit of a non-event as most of the company’s revenue was derived from its produce business and there was lost production from one greenhouse that was being converted to cannabis cultivation. The analyst echoes management’s assertion that it is poised to benefit from the current industry shortage.

“We believe that Pure Sunfarms, with its significant production capacity of ~75 tonnes, will be well positioned to benefit from the industry shortage which is expected to persist throughout 2019,” the analyst said. “Management indicated that B2B spot prices have increased in recent months in response to the strong consumer demand. In addition, to selling spot to other LPs, Pure Sunfarms intends to sell directly to provinces and could start in the coming weeks. This could accelerate market penetration and solidify the JV’s long-term position on the market place.”

In a research update to clients today, Landry maintained his “Buy” rating and one-year price target of $9.50 on Village Farms, implying a return of 50.6 per cent at the time of publication.

Landry thinks VFF will post EBITDA of $30.7-million and EPS of $0.30 in fiscal 2019. He expects those numbers will improve to EBITDA of $43.4-million and EPS of $0.49 the following year.

“VFF’s management has been more forthcoming than on previous calls about its growth strategy in the US and Mexico, suggesting that it sees an increased likelihood of these prospects materializing,” the analyst adds. “Our forecasts do not include any upside from hemp cultivation or from an entry into Mexico. With a valuation multiple of 8x EBITDA, VFF trades in line with junior Canadian LPs suggesting that investors are not reflecting VFF’s international prospects. This provides in our view an appealing entry point for investors which could benefit from significant upside upon these catalysts materializing.”