Village Farms is significantly undervalued, says Stifel

Cannabis and vegetable grower Village Farms (Village Farms Stock Quote, Chart, News TSX:VFF) just got a big target raise from Stifel GMP analyst Andrew Partheniou, who in an update to clients on Wednesday said the stock is significantly undervalued.

Vancouver-based Village Farms, which has three verticals in growing vegetables, cannabis and hemp in the US, announced on Tuesday a definitive purchase agreement with Emerald Health Therapeutics to acquire all its shares (37.0 million) in the joint venture Pure Sunfarms, representing about 41.3 per cent of the issued and outstanding common shares.

The deal is set at $61 million, with $45.8 million in cash and a $15.2-million promissory note due in six months. VFF will be fully consolidating PSF’s financial results upon closing, which is expected in late October of this year.

Concurrent with the purchase, VFF announced a $49.8-million financing round for about 9.4 million units priced at $5.30 per, which roughly matches Tuesday’s closing price.

Calling Pure Sunfarms Canada’s premier cannabis supplier, Michael DeGiglio, CEO of VFF, said the buyout will enable his company to fully leverage the experience and organizational capabilities of Village Farms onto its cannabis and CBD ambitions.

“Our ownership of all of Pure Sunfarms is a major next step in building on Village Farms’ foundation as one of North America's leading, vertically-integrated produce suppliers to become a diversified, plant-based consumer packaged goods business to expand into high value, high-growth opportunities in legal cannabis and CBD,” DeGiglio said in a press release.

Looking at the deal, Partheniou judged the value to be reasonable and estimated PSF’s enterprise value at $165 million.

The analyst said PSF continues to gain market share, all the while remaining profitable, making Village Farms a notable exception among Canadian cannabis LPs. Partheniou said PSF has gained dollar share in the flower category across its core markets in Alberta, BC and Ontario nearly every month in 2020, going from about 6.3 per cent in January to about 9.2 per cent by June.

“In our view, given flower products represent ~55 per cent of industry sales currently and the segment that comprises the foundation of an LP’s brand, PSF’s strong performance demonstrates the attractiveness of this prized asset,” Partheniou wrote.

“We view PSF as a top-tier LP that remains significantly undervalued. This transaction should increase financial transparency into the earnings power of VFF, while also enabling it to fully benefit from PSF's envious profitability while its peers find this milestone elusive. Hence, we believe VFF warrants the highest multiple amongst our Canadian coverage and now apply a 20x multiple (10x previously) to our 2021 EBITDA, which remains a 2x discount to the average of the only two peers that are expected to
generate meaningful EBITDA in that same year,” Partheniou wrote.

With the update, Partheniou kept his “Buy” rating on VFF but raised his target from C$11.00 to C$17.00, which at press time represented a projected 12-month return of 125.2 per cent. (All figures in US dollars except where noted otherwise.)