Cannabis company Village Farms International (Village Farms International Stock Quote, Chart, News TSX:VFF) has received a rating upgrade from Raymond James analyst Rahul Sarugaser who delivered an update to clients on Monday. Sarugaser said with now full ownership of Pure Sunfarms, Village Farms will reap the benefits of the low-cost, industry-leading grower.
Village Farms’ share price popped on Monday as the Delta, BC-based company, which grows and distributes produce, produces cannabis products via Pure Sunfarms and produces and distributes hemp and hemp-derived CBD in the United States, announced the completion of a previously-announced acquisition from joint venture partner Emerald Health of its shares in PSF. The deal sees VFF pay $79.9 million for the remaining 41.3 per cent of PSF equity in the form of $60.0 million in cash and $19.9 million in the form of a promissory note due in six months from the date of closing.
Village Farms CEO Michael DeGiglio said VFF shareholders can now fully benefit from PSF. “Pure Sunfarms is well positioned for long-term growth as one of what we believe will be just a small number of major suppliers to the Canadian cannabis market. Importantly, as part of the Village Farms organization Pure Sunfarms can now pursue additional opportunities to further leverage its success to date and increase its earnings potential,” DeGiglio said in a press release.
Sarugaser said with the soon-to-be-consolidated VFF and PSF revenue, the company’s rapid growth in market share and consistent EBIDTA-positive performance, VFF’s current share price represents “a compelling value buy.” The analyst has therefore moved his rating from “Outperform 2” to “Strong Buy.”
“As full owners of PSF, VFF has now cemented its position as Canada’s premier supplier of quality, high-volume cannabis. And, we think VFF’s timing is perfect. We believe the Canadian cannabis selloff is overdone for strong operators like VFF. We view VFF’s massive TX-based greenhouse footprint as a free upside option on an increasingly-probable, federally-lawful U.S. CBD and/or cannabis opportunity. And, importantly, we are observing VFF materially outperforming its peers in month-over-month cannabis sales,” Sarugaser said.
On the state of the industry in Canada, Sarugaser commented that Canadian retail cannabis sales grew by 25 per cent in the third quarter over the Q2, although October’s sales slowed from September’s. The national sales slump in October showed that revenue from the industry’s major players — excluding Village Farms — came in flat to down, month-over-month. In contrast, Sarugaser said, PSF’s revenue trended upward at a consistent roughly 15 per cent month-over-month from August through October.
Sarugaser said the numbers are illustrative of PSF’s “rapidly growing market share at the expense of its much larger market cap rivals. VFF appears to be the only member of the top 5 LPs by market share to grow its share in October.”
Sarugaser is calling for VFF to generate 2020 revenue and EBITDA of $158 million and $11 million, respectively, and 2021 revenue and EBITDA of $161 million and $18 million, respectively. His new rating comes with a maintained target price of $20.00, which at press time represented a projected 12-month return of 360 per cent. (All figures in US dollars.)