Village Farms has tons of upside, says Raymond James

Look for quarterly revenue from cannabis and vegetable grower Village Farms (Village Farms Stock Quote, Chart, News TSX:VFF) to see a big drop in wholesale cannabis sales, says Raymond James analyst Rahul Sarugaser who previewed VFF’s upcoming fourth quarter results in an update to clients on Friday.

Vancouver-based Village Farms is one of the largest vertically-integrated greenhouse growers in North America with produce, cannabis and hump production. VFF owns 57.4 per cent of cannabis company Pure SunFarms, a joint venture with Emerald Health.

VFF last week announced that its fourth quarter and year end financials will be released Tuesday, March 31, while at the same time management provided an update on the company vis a vis the COVID-19 pandemic.

Management said all of its own and PSF’s facilities will remain open, with the company taking appropriate steps and evolving practices to ensure the health and safety of its workers.

“Our customers, our consumers and our investors can be assured that, as good as we believe we are, our protocols are monitored and updated constantly so we have the ability to deal with any potential issue instantly. And I want to be clear that we will curtail or cease operations immediately at any of our individual operations should it become warranted. Our diversified footprint spanning three countries mitigates the potential impact of any such actions,” said CEO Michael DeGiglio in a press release.

On the quarter, Sarugaser said because PSF has been almost exclusively a cannabis wholesaler (meaning licensed producer to licensed producer sales), the calendar fourth quarter’s issues —mainly, an oversupply combined with a slow roll-out of cannabis retail stores in key markets, creating a supply bottleneck— will hit the company hard.

Sarugaser estimated PSF will see wholesale revenue as a percentage of its cannabis revenue stream drop from about 98 per cent to 25 per cent. As well, the analyst said PSF will likely see its total cannabis sales, combining adult-use and wholesale, drop from 8,438 kg in VFF’s Q3 to 5,625 kg in the Q4

“PSF has generated positive adjusted EBITDA during the last four consecutive quarters: a stand-out among Canadian LPs. Given the headwinds that PSF/VFF have faced in 4Q19, our opinion is that it will be difficult to maintain this streak. For now, we're projecting a slight EBITDA loss of ($0.1) million,” Sarugaser wrote.

The other major news on VFF’s quarter is the settlement of its dispute with Emerald Health (EMH), which came about earlier this month. As it played out, VFF ended up with 57.4 per cent of PSF’s equity while a supply agreement between VFF and EMH was severed.

Sarugaser called the end result a successful one for VFF, saying, “VFF now gets to recognize even more of PSF’s cannabis revenue—VFF’s most lucrative vertical—given its strengthened equity position in the JV. We foresee VFF taking steps to use its majority stake further dilute EMH's equity in PSF, eventually taking full control,” Sarugaser wrote.

Ahead of the quarterly results, the analyst has maintained his “Outperform 2” rating and $11.00 target price for VFF, which at press time represented a projected 12-month return of 217 per cent.