Village Farms International (Village Farms International Stock Quote, Chart, News, Analysts, Financials TSX:VFF) finally looks to be competing on an even footing with its Canadian cannabis peers, says Raymond James analyst Rahul Sarugaser, who delivered a report to clients on the company on Thursday. Sarugaser reiterated his “Strong Buy 1” rating but bumped up his target price from $20.00 to $26.00, which at the time of publication represented a projected 12-month return of 105 per cent.
BC-based Village Farms is a greenhouse vegetable grower who now owns 100 per cent of cannabis business Pure Sunfarms, based in Delta, BC, and has hemp-growing operations in the United States. VFF announced on January 20 the closure of a previously announced equity raise of $135 million, a registered direct offering of about 10.9 million shares at $12.40 per share. The company said the proceeds will go towards general working capital purposes. (All figures in US dollars except where noted otherwise.)
Village Farms’ share price had a rough 2019 like much of the cannabis sector and again did well along with cannabis over the back half of 2020, finishing the year up 63 per cent.
In his note, Sarugaser said while VFF’s share price escalation has been driven up the recent run-up in cannabis more broadly, he’s nonetheless still bullish on the stock.
“We continue to view VFF as the best operator in the Canadian cannabis sector, with strong up-side optionality on the U.S., so—while the argument could be made that VFF should trade at a premium—right-sizing VFF’s valuation in-line with peers is, in our view, still a conservative valuation methodology,” Sarugaser wrote.
On the equity raise event, Sarugaser deemed it a net positive, even as it amounts to a share dilution. The reason he gives is that the extra cash helps solidify Village Farms’ place now within the top five Canadian cannabis LPs. The esteemed group, Sarugaser said, includes Canopy Growth, Cronos Group, Aurora and the soon-to-be merged Aphria and Tilray, all of which have over $200 million on their balance sheets (aside from Aurora) to give them optionality and durability in the fast-evolving cannabis space.
Sarugaser said the cash should give VFF the ability to convert some of its vegetable greenhouse operations in BC and Texas to cannabis, with the latter conversion contingent on cannabis reform at the federal level in the US (which Sarugaser said is more a “when” rather than an “if,” now that the Democrats control both houses in Congress.
Also in its favour regarding the equity raise, according to Sarugaser, are: the fact that VFF’s management has been an excellent allocator of resources in the past; the fact that Canada’s adult-use market continues to grow and with Village Farms projected to capture about 20 per cent of that market, it will likely need to scale up production; the extra cash gives VFF the ability to pay off a C$19.9-million promissory note attached to its acquisition of the rest of its JV Pure Sunfarms, with the note due around May of this year.
Looking ahead, Sarugaser is calling for Village Farms to generate full 2020 revenue and EBITDA of $173 million and $7 million, respectively, and 2021 revenue and EBITDA of $288 million and $48 million, respectively.
Comparatively, the analyst has VFF trading at a 7.1x multiple of his 2021 EV/Revenue estimates, which compares to its peer average among Canadian cannabis LPs at 13.2x, making for a discount of 46 per cent.
Village Farms last reported earnings on November 13 where its three months ended September 30, 2020, saw net sales from Pure Sunfarms grow by 75 per cent year-over-year to C$22.6 million and adjusted EBITDA increase by 125 per cent year-over-year to $5.6 million.
Post the quarter, the company reported 15.2 per cent brand market share of dried flower at the Ontario Cannabis Store for the month of October, while its acquisition of all of the outstanding shares of Pure Sunfarms occurred on November 2. Village Farms also stretched out its reach through investments in Australia-based Altum International and Holland-based DutchCanGrow, where the latter gives VFF participation in one of a limited number of licensed cannabis growers when the Dutch government opens up Europe’s first legal rec cannabis market, according to Village Farms.
“The deep experience and organizational strength underlying our legacy produce business, which delivered another solid quarter, combined with our proven cannabis capabilities provides Village Farms with a rock-solid foundation as we transform to a vertically integrated, agriculturally-based CPG business to aggressively pursue high-growth opportunities in emerging legal cannabis and related markets in the United States and other targeted markets,” said Village Farms CEO Michael DeGiglio in the third quarter press release.
“There is no cannabis supplier in Canada or the U.S. with our combination of experience, capabilities and more than ten million square feet of greenhouse assets, and we are encouraged by the evolving regulatory environment in the U.S. and are developing multiple strategies to capitalize on any favourable U.S. regulatory developments in 2021. We will pursue these opportunities with prudent, disciplined capital allocation and focus on return on invested capital,” he wrote.
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