Village Farms is a cannabis sector winner, says Raymond James

After first quarter earnings, Raymond James analyst Rahul Sarugaser likes what he sees from Village Farms International (Village Farms International Stock Quote, Chart, News TSX:VFF).

In an update to clients on May 14 Sarugaser pointed to continued EBITDA strength from VFF’s joint venture cannabis operation as a sign that VFF’s experience as a vegetable grower is paying off in the pot sector.

Vancouver-based Village Farms is one of the largest vertically-integrated greenhouse growers in North America, with over nine million square feet under glass. The company has three segments: production and distribution of produce in the US, Canada and through a partner grower in Mexico, cannabis production and distribution through its 58.7 per cent owned Pure Sunfarms (PSF) operation and, thirdly, VFF is currently
pursuing production and distribution of hemp and hemp-derived CBD in the United States.

Village Farms announced its Q1 ended March 31 financials on May 14, showing $32.1 million in produce sales and $15.7 million in total gross sales from PSF, with a cost of cultivation per gram of $0.64 compared to a cost of $1.04 per gram a year earlier. (All figures in US dollars unless where noted otherwise.)

For the quarter, PSF remained the top-selling brand of dried flower at the online Ontario Cannabis Store, by both dollars and kilos sold, with a now 20.4-per-cent market share.

PSF launched a number of new products over the Q1, including branded retail dried cannabis products in Alberta, while also receiving approval from the Saskatchewan Liquor and Gaming Authority to supply product to the province’s private retail market.

CEO Michael DeGiglio said PSF is continuing to lead in cost of cultivation, giving it an “unmatched advantage” in the sector.

“We expect sales momentum to continue throughout this year as Pure Sunfarms pursues further growth in its market share and leverages its leading brand performance in dried cannabis in Ontario to capitalize on the expected continuing overall growth in the Canadian market, expansion in the number of retail stores, especially in Ontario, entry into additional provinces, and the introduction of new products, including cannabis oils and new product forms under Cannabis 2.0, which are targeted to begin in the summer of
this year,” DeGiglio wrote in the press release.

Comparing numbers, Sarugaser said PSF’s Q1 arrived in-line with his estimate on adjusted EBITDA at $1.1 million while gross revenue of $15.7 million was a miss of his $18-million estimate. The all-in cultivation costs of $0.64 per gram were higher than $0.50 for the previous quarter, which the analyst chalked up to winter conditions and increased energy requirements.

“So, PSF did it again,” Sarugaser wrote. “Its sixth consecutive EBITDA-positive quarter: a record among Canadian LPs. Also, this was its fifth consecutive quarter of positive net income.”

“Importantly, we saw a massive jump in PSF’s branded adult-use sales during the quarter: from $1.1 million to $4.6 million. This, in concert with a nice comeback in wholesale revenues, gave rise to a healthy balancing of PSF’s revenue channels: 47 per cent adult-use; 53 per cent wholesale. We could get used to this dual-income modus operandi,” Sarugaser wrote.

The analyst said understanding how to operate in a mature, thin-market market as VFF has been doing for decades (the company began in 1987) is now paying off in its PSF joint venture.

Sarugaser said he will update his forecast after management’s conference call (held on May 15). With the new update, the analyst has maintained his “Outperform 2” rating for VFF.