Village Farms is “materially undervalued”, says Raymond James

How well did Village Farms’ (Village Farms Stock Quote, Chart, News TSX:VFF) cannabis joint venture do over the past 12 months?

Very well, according to Raymond James analyst Rahul Sarugaser, who updated clients on the company in a Tuesday report, saying the evidence from the Ontario Cannabis Store (OCS) shows VFF’s Pure Sunfarms has been punching way above its weight in terms of market share.

The OCS released its year in review on Monday for the period of April 1, 2019, to March 31, 2020, with overall results showing Ontario consumers bought more than 35 million grams of cannabis in this first year of legalization. The report found a steady growth in sales over the period with selection of available products growing as well, including the introduction of cannabis derivatives or Cannabis 2.0 products.

The OCS review also noted that customers prefer higher THC products and that price have dropped by 25 per
cent on average over those 12 months.

On Pure Sunfarms, Sarugaser found the OCS sales ranked PSF fourth in terms of market share with six per cent of total flower sales, the largest cannabis category in Canada, with Aurora Cannabis and Ontario-only private company Redecan ahead of it. The analyst pointed out that PSF did finish ahead of Canopy Growth, the world’s largest cannabis company by market cap. Sarugaser also noted that VFF captured six per cent of the market share in dried flower sales in Ontario retailers, as well, where Ontario retailers saw $227.6 million of dried flower sales during the period versus $47.3 million at the OCS.

“The most intriguing thing about this analysis is that while CGC, ACB and others had a full 12 months of sales to capture these slices of the market, VFF only began selling cannabis in Ontario in October 2019: VFF captured fourth and fifth-place market share in Canada’s largest cannabis economy with only one half-year’s worth of sales,” Sarugaser wrote.

“Further, as we’ve previously noted, we estimate that the heavyweights like ACB—due to their much higher COGS — are driving less than one dollar of contribution margin per gram sold in the value category, which does little to make up for their large corresponding SG&A,” Sarugaser said. “Pure Sunfarms, on the other hand, grows cannabis at less than $0.80/g and is generating more than double the contribution margin of these larger players, which more than counterbalances its modest SG&A: key drivers of Pure Sunfarms’ six straight quarters of positive EBITDA—Pure Sunfarms is the only company in the Canadian cannabis sector to have had such a streak—making VFF, in our view, materially undervalued.”

Sarugaser called the recent strong performance by VFF’s share price a “right-sizing of VFF’s stock price,” and with the update, he reiterated his “Outperform 2” rating for the stock. Year-to-date, VFF is currently up 16 per cent.

Looking ahead, Sarugaser thinks VFF will generate fiscal 2020 revenue and EBITDA of $146 million and $9 million, respectively, and fiscal 2021 revenue and EBITDA of $149 million and $20 million, respectively.