Village Farms International has raised the bar, GMP says

A revenue beat in its latest quarter plus industry-best production costs are a recipe for success in the cannabis space for Vancouver’s Village Farms International (Village Farms International Stock Quote, Chart, News TSX:VFF), says GMP Securities analyst Andrew Partheniou.

In a client update on Wednesday maintained his “Buy” rating while raising his target price from C$25.50 to C$30.00.

Village Farms reported its second quarter ended June 30, 2019, on Monday, which featured record results from the company’s cannabis joint venture, the 50-per-cent owned Pure Sunfarms. For the quarter, PSF generated sales of $24.2 million, a 125-per-cent sequential improvement, with EBITDA increasing 194 per cent to $18.9 million. Gross margin was at a sparkling 84 per cent while cost of goods sold came in at a stingy $0.49 per gram. (All figures in US dollars unless where noted otherwise.)

“Pure Sunfarms’ second quarter financial results firmly rank it among the largest, most efficient and most profitable licensed cannabis producers in Canada, and clearly demonstrates that we have built a best in class cannabis operation setting a new bar for industry performance,’ said CEO Michael DeGiglio in the quarterly press release.

“VFF has raised the bar as a laser-focused strategy with decades of cultivation experience translates to industry-leading production costs and profitability…”

VFF’s share of PSF’s revenues amounted to $12.1 million, which beat Partheniou’s estimate of $8.0 million, while VFF’s consolidated EBITDA of $4.6 million, up from $1.3 million for the previous quarter, came in line with the analyst’s forecast of $4.5 million but lower than the consensus $5.9 million.

Noting that the $0.49 per gram makes PSF the low-cost industry leader, Partheniou says that the metric could improve even further as PSF scales to full capacity in the third quarter.

Going forward, management indicated that PSF was only operating at a 50-per-cent utilization rate over Q2 and that this would increase to 100 per cent for Q3. Combining that with a growing inventory and biological asset position and a tight wholesale market, Partheniou believes that PSF is set to double its sales once again next quarter.

“VFF has raised the bar as a laser-focused strategy with decades of cultivation experience translates to industry-leading production costs and profitability. With VFF shares trading at a ~25 per cent discount to peers and multiple catalysts near-term, we believe it offers an attractive entry point. Our target is based on a 15x multiple (unchanged) applied to our CY20 EBITDA,” says Partheniou.

Even more good news, the analyst reports on PSF’s currently delayed packaging license (management had earlier forecasted its arrival for Q2), saying,

“We believe [the license] could be awarded imminently, potentially triggering a waterfall of catalysts: 1) PSF’s brand launch coinciding with the award, 2) the JV benefiting from increased selling prices by selling directly into the REC channel, and 3) its negotiations with other provincial boards could be finalized once the packaging licence is awarded,” writes Partheniou.

The analyst has updated his forecasts, now calling for 2019 revenue and adjusted EBITDA of $148.6 million and $40.2 million, respectively, and 2020 revenue and adjusted EBITDA of $144.8 million and $75.8 million, respectively. Partheniou’s C$30.00 target represents a projected return of 67.2 per cent at the time of publication.