Village Farms success isn’t baked into its share price: GMP

GMP Securities analyst Andrew Partheniou is impressed with the traction generated in the cannabis sector by Village Farms International (Village Farms International Stock Quote, Chart, News TSX:VFF) and its cannabis-growing joint venture.

The analyst reviewed VFF’s latest quarterly results in an update to clients on Monday and reiterated his “Buy” rating and C$30.00 target for Village Farms, which as of publication date represented a projected return of 261.0 per cent.

Vegetable and cannabis grower Village Farms reported its third quarter results last Thursday, coming in with produce sales of $38.3 million compared with $39.7 million a year earlier. The company’s EBITDA was a loss of $2.4 million, although VFF got a positive EBITDA contribution from its 50-per-cent-owned cannabis joint venture Pure Sunfarms (PSF), which earned $5.0 million. (All figures in US dollars unless where noted otherwise.)

In his quarterly press release comments, CEO Michael DeGiglio noted that the Q3 was PSF’s fourth consecutive quarter of positive EBITDA, with an industry-leading all-in cost of production of C$0.63 per gram.

At the same time, DeGiglio was candid about both the slow roll-out of provincial retail in Canada as well as the C$7.2 million that VFF believes it is owed by its PSF partner, Emerald Health, saying,

“Pure Sunfarms continues to execute very well on what is under its control. Even as one of the largest Canadian adult-use cannabis suppliers by dollars sold, third quarter sales were constrained by the limited physical retail store infrastructure in Canada, as well as the C$7.2 million that could not be recognized,” wrote DeGiglio.

“We built Pure Sunfarms, however, for profitability out of the gate, even in a commoditized environment, and it is one of the few and most profitable Canadian cannabis companies,” he added.

Village Farms: VFF not being rewarded for execution

For his part, Partheniou said VFF’s share of PSF revenues for the quarter came in at C$12 million, which was down 25 per cent sequentially and attributed to the halving of its selling price to C$2.00 per gram.

Nevertheless, Partheniou really likes PSF’s low production costs, which are a difference-maker in the still-evolving Canadian market.

“With many LPs pointing to pricing pressure recently, it is now increasingly apparent that offering products customers seek and at low cost is key to winning a leadership position,” wrote Partheniou. “For the second consecutive quarter, VFF’s JV has achieved the lowest production costs amongst peers and seems to be rivaling the success of top-tier LPs in the REC market. However, this is not reflected in VFF shares, which trade at a ~35 per cent discount to mid-tier LPs, providing an ideal entry point.”

Other notables from PSF, according to Partheniou, include its 16-per-cent market share on a volume basis in the Ontario Cannabis Store for the month of October, where it had three of the top seven selling dried flower products, the expected launch of the company’s higher-margin products in the fourth quarter and Cannabis 2.0 products in the first half of 2020 and, finally, PSF’s shift from a challenging wholesale market to provincial channels, which could outpace wholesale as soon as Q1 2020, the analyst says.