With three decades experience in growing vegetables, Raymond James analyst Rahul Sarugaser thinks Village Farms (Village Farms Stock Quote, Chart, News TSX:VFF) will prove more than adept at growing cannabis.
In a research report released Monday, Sarugaser initiated coverage of VFF with an “Outperform” rating and a one-year price target of $11.00, which implied a return of 74.1 per cent at the time of publication.
Tomatoes aren’t marijuana, but the Raymond James analyst thinks the company is already proving that is handle on this new crop.
“Village Farms International, Inc. (VFF) is leveraging more than 30 years of fresh produce cultivation experience—30 years developing intimate knowledge of its greenhouses and region-specific climate— to pursue opportunities in cannabis through its 50% ownership of B.C.-based Pure Sunfarms Corp.: one of the largest cannabis operations in the world,” the analyst noted. “From VFF’s first announcement describing aspirations in the cannabis industry—less than three years ago—to the present, Pure Sunfarms has become the lowest cost greenhouse grower in Canada, averaging an all-in production cost of US$0.48/g (C$0.63/g) last quarter.”
Sarugaser says VFF is especially well-positioned, considering how the cannabis space has played out in the past few months.
“We believe VFF, via Pure Sunfarms, is positioned to shine in the current cannabis market environment, which is increasingly focused on operations, execution, and profitability. At the time of writing, Pure Sunfarms had posted four consecutive quarters of EBITDA-positive results—boasting US$10.1 mln (C$13.3 mln) in EBITDA (56% EBITDA margin) and gross margins last quarter of 69%—yielded exclusively from sales of dried cannabis to other licensed producers (LPs). Late last quarter (3Q19), Pure Sunfarms began selling branded cannabis directly to distributors in Ontario and British
Columbia, which—so long as processing, packaging, and shipping costs are tempered—could drive outstanding future contribution margins on account of much higher selling prices and sustained industry-leading production costs,” he said.
The analyst says Village Farms has no problems with competition or commoditization.
“The company has made a practice of dominating agricultural verticals in which North American producers have, traditionally, struggled to thrive due to intense international competition in commoditized markets,” Sarugaser said. “VFF was the first company we’ve met that not only welcomed the idea of commoditization in the cannabis space, but suggested that it would gladly play a key part in catalyzing said commoditization. We appreciate management’s—seasoned agriculturalists, supply chain experts, and retail specialists—confidence, and the track record that supports this confidence.”
Sarugaser thinks VFF will post Adjusted EBITDA of $14.1-million on Net Revenue of $150.9-million in fiscal 2019. He expects those numbers will improve to EBITDA of $23.0-million on Net Revenue of $153.2-million the following year.
“With several million square-feet of high-tech greenhouses at its fingertips, decades of local weather data, and 30 years successfully operating in a super-tight margin business—fresh produce —we believe VFF, via Pure Sunfarms, is positioned to shine in the now-maturing cannabis market environment, which is increasingly focused on operations, execution, and profitability,” the analyst adds.