Village Farms is the best-positioned Canadian LP, Beacon says

In an update to clients on Friday, Cooper reiterated his “Buy” rating but dropped his target price from C$55.00 to C$40.00, saying that Pure Sunfarms is clearly the best-positioned licensed cannabis producer in Canada.

Vancouver-based vegetable and cannabis grower Village Farms reported its third quarter financials last Thursday, showing produce sales of $38.3 million, down from $39.7 million a year earlier. The company’s overall net loss before tax was $6.5 million which included the loss from Pure Sunfarms, the company’s 50-per-cent owned joint venture with Emerald Health. (All figures in US dollars unless where noted otherwise.)

In its quarterly comments, management pointed out that PSF was the top-performing brand of dried flower by both kilograms sold and dollar sales with the Ontario Cannabis Store for the month of October, garnering 16 per cent of market share by kgs sold.

“We are pleased to report another quarter in which Pure Sunfarms continued to set the standard for performance as a best-in-class cannabis operation, which again drove strong financial performance,” said Village Farms CEO Michael DeGiglio in a press release.

“Pure Sunfarms’ achieved its fourth consecutive quarter of positive EBITDA, with an industry leading all-in cost of production of C$0.63, gross margin of 69 per cent and EBITDA margin of 56 per cent. In the 12 months since adult-use cannabis was legalized in Canada in October 2018, Pure Sunfarms has already generated C$47 million in EBITDA, an especially impressive number given that its operations were ramping up throughout most of that period,” DeGiglio said.

In his update, Cooper did not say whether the quarter did or did not meet his expectations on revenue and EBITDA but the analyst compared VFF’s results with those of other licensed producers in Canada, showing that not only did PSF have by far the largest volume over the quarter at 12,000 kg sold (the next-largest was Sundial at 7,944 kg) but that at an estimated price of $2 per gram, PSF’s business model was truly stress-tested over the quarter and came out fine, showing proforma gross margin of 76 per cent and an industry-leading cost per gram of $0.63.

Cooper says there is no doubt that the future direction of cannabis prices is lower and, moreover, that many other companies in the industry are not positioned to deal with substantially lower prices. But PSF has proven in its Q3 that it can come out EBITDA positive.

“The Q3 reporting season is separating the strong from the weak,” writes Cooper. “We continue to believe that at the end of the day, there will be three to five Canadian players who will control 90 per cent of the market. While roll-out of stores has been slower than expected, we still believe the Canadian cannabis market will be multi-billion dollar.”

“PSF’s Q3 results indicate that it is the strongest LP in Canada in terms of product sold, low-cost producer, ability to scale and the balance sheet to support it and its model has now been stress-tested at a price/g of $2 – a test no other LP would pass,” he writes.

Cooper says that the expected lower selling prices will impact PSF’s sales going forward, however, which in turn have resulted in a decrease in the analyst’s EBITDA forecast for VFF for the years 2019 to 2021.

Consequently, Cooper’s target is down to C$40.00 per share, which at press time represented a projected 12-month return of 372 per cent.