Beacon Securities analyst Doug Cooper is staying steady on Village Farms International (Village Farms International Stock Quote, Chart, News TSX:VFF) after the cannabis company announced it bought a stake in a Dutch cannabis business.
Cooper issued an update to clients on Friday in which he maintained his “Buy” rating and $28.00 target price, saying the new agreement gives VFF a head start compared to other Canadian LPs when it comes to the expanding European market.
Vancouver-based Village Farms, which has a vegetable growing business, a cannabis segment through its JV Pure SunFarms as well as hemp growing operations in the United States, announced last Wednesday an agreement with DutchCanGrow (DCG) to become a 16 per cent owner of the business, along with six other shareholders, all of whom are Dutch companies aside from VFF.
DCG is pursuing one of up to ten licenses to grow cannabis in the Netherlands, an industry which is expected to begin this fall, with DCG planning to build a greenhouse facility if it’s selected under the four-year pilot program. Currently, the Netherlands has 78 designated coffee houses where selling and purchasing cannabis is legal but growing and producing the product is illegal.
VFF says its investment in DCG is a big first step in becoming a leader in the international cannabis trade.
“DCG is an outstanding opportunity for Village Farms, not only providing potential access to the very first legal recreational cannabis market in Europe with the possibility of significant expansion within the Netherlands itself, but also to springboard to future legal cannabis opportunities in other markets in Europe, and around the world,” said CEO Michael DiGiglio in a press release.
Cooper said the fact that DCG picked Village Farms among the group of Canadian LPs is significant.
“The selection of VFF as DCG’s only foreign partner highlights both VFF’s strong relationships within the country but also a signal that the Dutch partners believe VFF has something of value to add, ie. its history and success in Canada as a profitable cannabis grower. We believe it is likely that other Canadian LPs would have been interested but clearly did not make the grade to become a ‘partner,’” wrote Cooper in his report.
Looking at the numbers, Cooper said Holland’s 78 cannabis-selling coffee hours buy about 65,000 kg per year and that if the program is successful, the Dutch government would expand it to the entire country which includes 580 coffee houses.
The program would make Holland the first European country to legalize adult-use cannabis, where medical cannabis has already been legalized in a number of jurisdictions. Cooper said the Dutch experiment could create a snowball effect throughout Europe with likely joiners including Germany, the other Benelux countries, Spain and Portugal.
Altogether, the European cannabis market is expected to grow from €240 million in 2019
to €35 billion by 2024.
Cooper said that while a number of Canadian cannabis companies have had success in exporting to Europe, the future of that market is in in-situ production.
“With VFF planting its flag in The Netherlands, we believe this gives it a huge head start.
With ownership of facilities in Canada (largest footprint, most profitable), the US (huge potential upon federal regulation change) and now The Netherlands, we believe VFF remains ideally positioned,” Cooper wrote.
As of publication date, Cooper’s $28.00 target price represented a projected 12-month return of 318 per cent.