A settlement with its joint venture partner is a good sign for vegetable and cannabis producer Village Farms (Village Farms Stock Quote, Chart, News TSX:VFF), says Raymond James analyst Rahul Sarugaser, who gave a research update on the company on Tuesday.
Vancouver-headquartered Village Farms is a vertically-integrated greenhouse grower with facilities in BC and Texas as well as partner greenhouses in BC, Ontario and Mexico. The company entered into the cannabis market with a 50 per cent stake in the joint venture Pure Sunfarms with Emerald Health Therapeutics.
That JV became the focus of a lawsuit announced last fall which VFF says was brought on by EMH not fulfilling its end of a previously signed supply agreement for 40 per cent of Pure Sunfarms’ cannabis supply, effectively leaving about $13 million unpaid to the JV and about $7.2 million unpaid to VFF.
The company on Tuesday announced a settlement in the dispute, one which sees Village Farms now owning 57.4 per cent of PSF while releasing Emerald from all liability stemming from the aforementioned supply agreement. As well, VFF is making an additional $8.0-million equity contribution to PSF, with VFF receiving additional shares to reflect the contribution, and an Emerald-issued shareholder's loan of $13.0 million plus $1.1 million in accrued interest that EMH previously had demanded be repaid will now
remain with Pure Sunfarms as a result of the settlement.
The end results is a victory for Village Farms, says Sarugaser, in that the company got to follow through on its intention to dilute EMH from PSF.
“VFF's augmented equity stake in Pure Sunfarms bodes well with the company's February 26 announcement that it has begun shipping Pure Sunfarms branded products into the Alberta adult-use cannabis system: Canada's most developed retail cannabis network with 423 of Canada's 805 total operating retail stores,” Sarugaser wrote.
“This in combination with VFF's indication that Pure Sunfarms was Ontario's top performing dried flower brand during 4Q19, capturing 13 per cent of the ON dried flower market share we view very positively. We suspect these recent windfalls may provide for a Pure Sunfarms' revenue ramp into the adult-use market while many other producers see declines, with VFF now capturing a larger revenue-share,” Sarugaser said.
Looking ahead, Sarugaser thinks VFF will deliver fiscal 2020 revenue and EBITDA of $153 million and $23 million, respectively. With his report, Sarugaser reiterated his “Outperform 2” rating for Village Farms.
Considering last week’s announcement of wholesale shipping to Alberta, Pure Sunfarms now has products available in three provinces, including Ontario and BC, with management saying that it continues to push for supply agreements with other provinces.
“With the province's extensive network of licensed retail outlets and strong retail sales, the Alberta cannabis market presents a substantial opportunity for Pure Sunfarms as we continue to share our high-quality BC bud with even more Canadians,” said Mandesh Dosanjh, President and CEO, Pure Sunfarms, in a press release.
Village Farms last reported its quarterly financials in November where its third quarter results featured produce sales of US$38.3 million compared with US$39.7 million a year earlier and an EBITDA loss of US$2.4 million. For the quarter and before Village Farms’ 50 per cent share, Pure Sunfarms’ revenue was US$18.1 million and EBITDA was US$10.1 million. (All figures in Canadian dollars except where noted otherwise.)
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