Village Farms is a better bet than Aphria, Raymond James says

If you’re looking for a good bet in the Canadian cannabis space, you should be thinking about Village Farms International (Village Farms International Stock Quote, Chart, News TSX:VFF), says Raymond James analyst Rahul Sarugaser, who in an update to clients on Wednesday compared recent quarterly results from licensed producer Aphria to Village Farms’ numbers.

The result? Sarugaser sees VFF as the clear favourite.

Leamington, Ontario-based Aphria posted fiscal fourth quarter ended May 31 numbers on Wednesday, showing net revenue up sequentially to $152.2 million compared to $144.4 million in its previous quarter and adjusted EBITDA of $8.6 million. The company also had a $98.8 million net loss and $64 million in impairment charges.

The Q3 represented Aphria’s fifth consecutive quarter with positive adjusted EBITDA, a rarity in the still-emerging cannabis space.

But as Sarugaser pointed out in his report, Village Farms with its 58.7 per cent-owned cannabis joint venture Pure Sunfarms has had six consecutive EBITDA-positive quarters, the best in the industry, according to the analyst.

“And we're predicting a seventh consecutive EBITDA-positive quarter for VFF—despite our coincident prediction of flat revenues—for its upcoming 2Q20 earnings,” Sarugaser wrote.

Sarugaser compared the all-in costs of cannabis production from Aphria, which stood at $1.69 per gram as of its Q3, to VFF’s, which is at $0.67 to $0.88 per gram, a wide separation, the analyst said.

“We see VFF's capacity to produce cannabis at such low costs as the company's long-term advantage, especially given the emerging importance of the Canadian cannabis market's deep value category (<$5/gram retail price),” Sarugaser said.

“Given VFF's large relative production cost advantage, APHA and VFF's similar estimated earnings profiles, and the fact that APHA is trading at more than double VFF's 2021 EV/EBITDA multiple — APHA: 31x; VFF: 12x—we view VFF as the far better buy,” Sarugaser wrote.

With the update, Sarugaser has reiterated his “Outperform 2” rating for Village Farms, which he forecasts will generate fiscal 2020 revenue and EBITDA of $146 million and $4 million, respectively, and fiscal 2021 revenue and EBITDA of $149 million and $13 million, respectively.

Last year, VFF’s share price gained 82.5 per cent, while so far in 2020 the stock is now at even, having regained ground lost earlier in the year.

Set to deliver its second quarter earnings during the second week of August, Village Farms last reported on May 14 where Pure Sunfarms had net sales of $18.0 million, comprised of $8.5 million in retail branded sales and $9.5 million in wholesale sales, and EBITDA of $6.7 million, representing a margin of 37 per cent.

With its Q1, Pure Sunfarms stayed as the top-selling brand of dried flower by both dollars and kilograms sold at the Ontario Cannabis Store.

“The first quarter of 2020 saw significant momentum in Pure Sunfarms' branded retail sales, with sales to provincial distributors increasing by 118 per cent on a 179 per cent increase in grams sold over the fourth quarter 2019. The significant increase was driven by Pure Sunfarms continued leading dried cannabis market share in Ontario, which was 14.3 per cent for the first four months of 2020 – exceeding 20 per cent in the month of April – as well as expansion into Canada's second largest province for cannabis sales, Alberta, in late February,” said Village Farms CEO Michael DeGiglio in press release.