Village Farms International’s (Village Farms International Stock Quote, Chart, News TSX:VFF) market strategy is winning over cannabis consumers, according to GMP Securities analyst Andrew Partheniou, who resumed coverage of the stock on Tuesday with a “Buy” rating and C$30.00 target price.
Cannabis and produce grower Village Farms is down 33 per cent as part of the wider selloff in the pot sector, but Partheniou thinks the company is nonetheless operating successfully in the burgeoning cannabis trade through its 50 per cent owned joint venture Pure Sunfarms (PSF).
In a report to clients, the analyst says that PSF has recently begun shipping into the Ontario recreational cannabis channel during the last two weeks of September with BC following in October. Partheniou estimates PSF to have about 20 per cent market share on a volume basis in the dried flower category via the Ontario Cannabis Store, seemingly putting the company in second place volume-wise just a month into its introduction.
That’s a sign that PSF’s products are resonating with customers, says Partheniou.
“As evidenced by the market share data, we believe PSF’s strategy is winning over consumers and is sustainable given its industry-leading production costs. Hence, we believe PSF could increasingly shift future selling volumes from its traditional wholesale market to the REC channel, thereby building on its existing brand traction and realizing higher selling prices,” writes Partheniou.
“As PSF redirects wholesale volumes towards the REC market and likely signs additional provincial supply agreements while the REC market continues to grow with Cannabis 2.0 products being introduced in 2020, our long-term thesis remains intact,” he says.
The analyst estimates that PSF’s products are priced at a discount of between 15 and 20 per cent compared to its peers, exemplifying the company’s pursuit of a quality products at attractive prices market strategy.
Partheniou’s coverage resumption follows on the heels of the VFF’s recent equity financing, a $28.75-million bought deal at an offer price of C$9.40 per share which closed on Tuesday. The company says that it will use the net proceeds for working capital and general corporate purposes. The analyst says that the deal gives VFF a current cash balance of around $42 million.
Also of note from Village Farms was an announcement last week concerning an ongoing issue with its PSF partner Emerald Health Therapeutics, which has said that it intends to file a dispute notice to PSF under its existing supply agreement. The gist is that PSF has been selling volumes of cannabis not purchased by Emerald Health in the spot wholesale market and thus at prices below the supply contracts’ fixed price and, given the take-or-pay clause, VFF believes that Emerald Health owes about $7 million to PSF due to the differential in selling prices.
One result of the dispute, says Partheniou, is that it could put PSF’s average wholesale market price for its third quarter below his previous expectation of $4.00 per gram, thus leading to a reduction in the analyst’s consolidated EBITDA forecast for VFF.
Going forward, Partheniou thinks Village Farms will generate fiscal 2019 revenue and adjusted EBITDA of $148.6 million and $36.6 million, respectively, and fiscal 2020 revenue and adjusted EBITDA of $144.8 million and $81.3 million, respectively.
His C$30.00 target represented a projected return of 204.6 per cent at the time of publication. (All figures in US dollars unless where noted otherwise.)