Village Farms gets a price target raise at GMP

Despite a quarter that fell below his expectations, GMP Securities analyst Martin Landry has raised his price target on Village Farms International (Village Farms International Stock Quote, Chart TSX:VFF).

On Wednesday, Village Farms reported its Q4 and fiscal 2018 results. In the fourth quarter, the company posted Adjusted EBITDA of (All Figures USD) $1.5-million on sales of $40.6-million, a topline that was up ten per cent over the same period last year.

“It is a remarkable achievement for Pure Sunfarms to not only generate positive net income in just its first full quarter of sales, but for Pure Sunfarms to be profitable for the entire year, during most of which the Pure Sunfarms greenhouse was in the process of being converted for cannabis production,” CEO Michael DeGiglio said. “It is demonstrative of the value that Village Farms, with its 30 years of experience as a large-scale, low-cost developer and grower, brings to the Pure Sunfarms joint venture, as well as the advantage of pursuing the Canadian cannabis opportunity via an established, high-performance greenhouse operation with more than 750 years of combined grower experience, an experienced skilled labour force already in place and the benefit of years of operating history across multiple crops in multiple regions around the world.”

Landry says revenue from the company’s fifty per cent owned JV, Pure Sunfarms, was just $3.6-million, well below his expectation of $15.0-million. But the analyst says this does not seem to stem from a demand issue but rather from product availability.

What’s more, Landry say the new visibility on the Sunfarms operation provides him with more confidence going forward.

“VFF’s Q4/18’s results brings visibility into the Pure Sunfarms’ operations given it’s the first quarter of sales. Low production costs and lean SG&A infrastructure bode well for the JV’s earnings power. As a result we have increased our profit margin assumptions for PSF. Our target price is derived using a sum of the parts where: (1)the Pure Sunfarms JV is valued at ~$10.50 (previously $8.50), (2) the current produce business is $0.70, (3) the optionality of the conversion of Delta 2 is at $5.30 (previously $4.30), and (4) the Village Fields Hemp JV is $3.50.”

In a research update to clients today, Landry maintained his “Buy” rating, but raised his one-year price target on Village Farms from $17.00 to $24.00, implying a return of 15.3 per cent at the time of publication.

“Given that Village Farms is a partial owner of some of its major ventures, we use a sum of the parts analysis to value VFF shares,” the analyst explains. “We value the Pure Sunfarms venture with a DCF calculation using: (1) an 8.25% discount rate, (2) a 3.5% share of the Canadian recreational market, (3) a 35% EBITDA margin, and (4) a 3.25% terminal growth rate. We then take 50% of the implied valuation to account for VFF’s ownership. The optionality of the Delta 2 conversion is valued by applying a 50% probability discount to our estimated valuation of the Delta 3 facility, which is of similar size and production capacity. To value the Village Fields JV we assume the whole entity could generate US$21m-US$24m of EBITDA in 2020 and apply a 10x multiple, which suggests a value of ~US$140m for VFF’s 65% ownership after accounting for its US$15m funding contribution. Lastly, the legacy produce business is incorporated into our sum of the parts by applying a 5.0x EV/EBITDA multiple to our CY20 estimate.”