Following news this morning from Village Farms International (Village Farms International Stock Quote, Chart TSX:VFF), GMP Securities analyst Martin Landry has raised his one-year price target on the stock.
This morning Village Farms announced that its 50 per cent JV partner Pure Sunfarms had exercised its option on a second facility, located next to its 1.1-mllion square foot facility, effectively doubling its production capacity.
“With an ongoing shortage of supply from Canadian cannabis producers, Village Farms is thrilled that Pure Sunfarms’ has made the decision to more than double its production capacity with the addition of Delta 2 – just three weeks after the option became exercisable,” CEO Michael DeGiglio said. “Pure Sunfarms is setting itself apart amongst the top echelon of Canadian licensed producers, achieving its conversion and production ramp up milestones, meeting or exceeding expectations on quality, yield and cost, and delivering profitability in its first full quarter of operations. The unmitigated success of the conversion, licensing and production ramp up of the Delta 3 facility, alongside the outstanding performance of Pure Sunfarms’ management and operational teams, gives us great confidence in their ability to execute on the Delta 2 facility. Delta 2 will also benefit from the continued support of Village Farms, with its decades of large-scale, low-cost operational experience and greenhouse design and systems acumen, as well as the significant learnings gained through the conversion and ramp up of the Delta 3 facility.”
Landry says this is a clear positive.
“The conversion of Delta 2 is a material event that was long awaited and is a continuation of the company’s transition into a pure play cannabis company. VFF generates limited EBITDA (5% margins) by growing produce in Canada and hence the conversion to cannabis could be a significant boost to its earnings with PSF realizing EBITDA margins of 30% or higher. We could see a scenario where the JV generates revenues in excess of $300m.”
In a research update to clients today, Landry maintained his “Buy” rating but raised his one-year price target on VFF from $22.00 to $22.50, implying a return of 16.9 per cent at the time of publication.
Landry thinks Village Farms will produce EBITDA of $25.0-million in fiscal 2019. He expects that number will rise to $52.2-million the following year.