It’s only a matter of time before Village Farms International (Village Farms International Stock Quote, Chart, News TSX:VFF) really takes off, says Raymond James analyst Rahul Sarugaser, who profiled the company in a research report to clients on Tuesday.
Sarugaser said the vegetable grower is likely at some point in the future to take majority or full ownership of cannabis joint venture Pure Sunfarms, which would provide considerable upside to the stock’s current value.
BC-based Village Farms is one of the largest vertically-integrated greenhouse growers in North America with more than nine million square feet under glass. The company has three primary verticals in fresh produce, cannabis (via its 58.7 per cent stake in Pure Sunfarms), and hemp, with its PSF cannabis operations involving production and distribution in Canada and hemp production in the United States.
The stock has struggled since the start of the sector-wide downturn in the spring of 2019 and currently sits down 13 per cent for 2020.
In his report, Sarugaser argued that the full value of VFF hasn’t been realized by its current share price, for a number of reasons.
On the one hand, VFF now has seven consecutive quarters of positive EBITDA after its most recent earnings report earlier this month. Sarugaser said this is a record for the Canadian cannabis industry. Only Aphria has had five consecutive quarters of positive EBITDA, while other heavyweights like Canopy Growth, Tilray and Aurora Cannabis have returned negative EBITDA in recent quarters. And so, Sarugaser said VFF’s share price depreciation of 19.5 per cent in the two weeks following its latest quarterly release “makes no sense to us.”
On the other hand, Sarugaser points to the potential for VFF to take full control of PSF, a hypothetical situation which the analyst calls “highly likely.”
“In our view, VFF's value is being fundamentally misunderstood, and we believe that once the market begins prioritizing EBITDA above top-line revenue—a hollow metric, as we see it —VFF's value would be right-sized toward our target of $14.00,” Sarugaser wrote.
“Thereafter, in the scenario wherein VFF captures majority (or 100 per cent) ownership of PSF, we calculate VFF share upside at $17.00 to $27.00. In our opinion, this is a highly likely scenario, particularly because VFF's JV partner, Emerald Health, had just $0.6 million in cash on its balance sheet at its last reported quarter, though we note that EMH currently has a $3 million ATM offering, and has been offsetting its debt with shares,” he wrote.
“As we see it, VFF's acquisition of PSF is just a matter of time,” Sarugaser said. With the report, Sarugaser has updated his forecasts, now calling for 2020 revenue of $153 million (previously $146 million) and for 2021 revenue of $157 million (previously $149 million). On EBITDA, the analyst is projecting $6 million for 2020 (previously $4 million) and $17 million for 2021 (previously $13 million).
Sarugaser is maintaining his “Outperform 2” rating and $14.00 target price, which at press time represented a projected 12-month return of 203 per cent.