Even with the recent run-up in share price, Canadian cannabis LP Village Farms (Village Farms Stock Quote, Chart, News TSX:VFF) is still trading at a discount to its peers, says Raymond James analyst Rahul Sarugaser, who delivered a report to clients on Tuesday to shed light on the stock’s strong performance.
Village Farms had been cruising along at pretty well even for the year when the stock started taking off with the delivery of third quarter financials on November 13. Since then the stock has risen an incredible 57 per cent on strong quarterly numbers featuring revenue up 75 per cent year-over-year to $22.6 million from its Pure Sunfarms cannabis business, now a 100-per-cent owned entity. EBITDA of $5.2 million handily beat the consensus estimate of $1.9 million, as well. (All figures in Canadian dollars except where noted otherwise.)
But the rise in share price has more to it than a strong quarter, says Sarugaser.
“What impelled this stock move is relatively clear. To date, VFF has never been able to consolidate its revenues with those of its now wholly-owned cannabis JV, Pure Sunfarms (PSF), so cannabis-focused EV/Revenue or EV/EBITDA multiples have been quite obscure, a barrier to investors who are not keeping close track of the story,” Sarugaser wrote.
“Beginning in 1Q21, VFF will begin fully consolidating its earnings with PSF’s, which we believe will be catalytic. As such, we pointed out that while peers had been trading at 7.3x 2021 EV/Revenue, VFF was trading at 3.5x (a 50-per-cent discount). For 2022, multiples were 5.1x for peers versus just 2.0x for VFF (a 60-per-cent discount),” he said.
“And we’re not even talking about EBITDA multiples — the more relevant long-term measure, in our view — which imply an 80-per-cent discount to peers,” Sarugaser said. “So, with its 3Q20 earnings, we believe investors finally started to take note of VFF’s deep fundamental strength and its deep discount relative to peers.”
Over the past six trading days, Village Farms’ 57-per-cent gains compare to the Horizons Marijuana Life Science ETF, which tracks the sector as a whole, whose gains over that period were 2.5 per cent. Since November 2, VFF is up 102 per cent versus HMMJ up 30 per cent.
The analyst said on a revenue basis, VFF’s recent run-up has corrected the stock’s discount “somewhat” but not enough to entirely eliminate the asymmetry, where he sees VFF to be currently trading at 5.9x 2021 and 3.4x 2022 EV/Revenue, which would represent 20 and 34 per cent discount to its peer group.
With the new update, Sarugaser has reiterated his “Strong Buy 1” rating with a target price of US$20.00, which at press time represented a projected 12-month return of 113 per cent.
“Should the stock show any weakness from profit-taking [on Tuesday] (although pre-market trading implies a strong open), we would continue to see this as a very good entry point into what is, in our view, Canada’s premier cannabis operator (and U.S. dark horse),” Sarugaser wrote.
Vancouver-based Village Farms has more than nine million sq ft of greenhouse in North America and is comprised of three businesses: production and distribution of produce in the US, Canada and through partner growers in Mexico, production and distribution of cannabis products in Canada via Pure Sunfarms and production and distribution of hemp and hemp-derived CBD in the US.
Pure Sunfarms began as a joint venture with Emerald Health at a 50/50 split. Village Farms has progressively bought out Emerald Health since then, completing the move with an announcement on November 2 that it had acquired the remaining shares.
“The acquisition of the entirety of Pure Sunfarms is a defining moment for Village Farms, furthering our transformation to a vertically integrated, plant-based consumer packaged goods company,” said Village Farms CEO Michael DeGiglio in a press release. “It allows us to fully leverage the invaluable cannabis expertise Village Farms has gained in combination with the organizational strength underlying the Village Farms produce business to pursue high-growth opportunities in emerging legal cannabis and CBD markets in the United States and targeted markets internationally.”
On Monday, Village Farms announced a Health Canada research license for PSF to conduct on-site human administration trials for sensory evaluation of cannabis, which gives the company “significant new opportunities in the formulation and refinement of our products and underscores our commitment to innovation and the advancement of the Canadian cannabis consumer experience,” said Mandesh Dosanjh, President and CEO of Pure Sunfarms in a press release.
In the same release, VFF announced that PSF-branded CBD products will make their international debut in Hong Kong over the holiday season through a partnership with Altum International, an Asia-Pacific CBD retail platform and café and Chinese luxury department store Lane Crawford.
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