Raymond James analyst Rahul Sarugaser is staying bullish on Canadian cannabis licensed producer Village Farms (Village Farms Stock Quote, Chart, News, Analysts, Financials TSX:VFF) after the company’s latest earnings report. In an update to clients on Tuesday, Sarugaser reaffirmed his “Strong Buy 1” rating for VFF, saying a nominal revenue miss and resultant dip could be a buying opportunity for investors.
Delta, BC-headquartered Village Farms is one of North America’s largest vertically-integrated greenhouse growers with three primary segments in produce production and distribution in US, Canada and through grower partners in Mexico, cannabis production and distribution in Canada through its now 100-per-cent ownership of Pure Sunfarms, and international cannabis initiatives with part-ownership in Altum and DutchCanGrow. The company also has optionality in the US cannabis market through its greenhouses in Texas which are convertible to cannabis cultivation in the event of federal cannabis reform.
VFF’s share price started taking off about this time last year and has never really looked back, bringing the stock from $2.50 to almost $20.00 by mid-February. The stock has pulled back a bit since and is currently trading around $16.00. (All figures in US dollars.)
But VFF dropped on Tuesday with the release of its fourth quarter and full 2020 financials. There, the company hit $47.4 million in combined produce and cannabis revenue, up 43 per cent year-over-year, and an adjusted EBITDA loss of $0.5 million compared to a loss of $7.5 million a year earlier. VFF’s cannabis numbers alone were net revenue of $17.3 million, representing a year-over-year increase of 86 per cent, and adjusted EBITDA of $2.4 million, down from $5.3 million a year earlier.
In its Q4 press release, Village Farms pointed to its status as the top-selling brand of dried flower products with the Ontario Cannabis Store (by both kilos sold and dollars) since the company’s product launch in October 2019. The company also noted its rollout of Cannabis 2.0 products, with Full Spectrum Vapes and bottled oil products hitting stores this past September and Pure Sunfarms cannabis-infused gummies starting in early last month. One of the bigger headlines from the fourth quarter, however, was VFF’s acquisition in November of the remaining shares of Pure Sunfarms (PSF), previously a joint venture held with Emerald Health.
“The fourth quarter was a solid finish to a year of significant achievement for Village Farms and our wholly owned Canadian cannabis subsidiary, Pure Sunfarms, which saw great success as it transitioned its focus to retail branded sales from nearly all sales in 2019 being non-branded, mainly to other producers,” said VFF CEO Michael DeGiglio in a March 16 press release.
“Following a 40-per-cent sequential increase from the second to the third quarter of 2020, Pure Sunfarms sales of branded retail products to provincial distributors increased another 28 per cent sequentially from the third to the fourth quarter, as our branded dried flower products continued to be the top seller with the Ontario Cannabis Store, and our first Cannabis 2.0 products were well received by consumers. This contributed to our ninth consecutive quarter of profitability, even as we invested during the quarter to support our future growth,” DeGiglio said.
Looking at the quarterly numbers, Sarugaser said the $47.4 million in revenue came in below his $55.4-million estimate as well as the consensus call for $54.6 million, while the EBITDA loss of $0.5 million was below the analyst’s call for $1.7 million in EBITDA and the Street’s estimate of $3.1 million. At the same time, Sarugaser said Village Farms’ overall net income of $7.0 million beat his estimate of $0.5 million and the consensus $0.6 million.
On the revenue miss, Sarugaser said it was a case of the Street overestimating the percentage of PSF that would consolidate in VFF’s fourth quarter revenue, where the estimate was at about 83 per cent while the actual consolidation was about 70 per cent. That made for about a $5.0-million overestimate on revenue, according to Sarugaser.
The analyst said investors should take note of VFF’s upcoming results for the first quarter 2021, which will allow for a better comparison between VFF’s cannabis operations and those of other leading Canadian LPs. Sarugaser said the results will be a catalyst for the stock.
“With its 1Q21 earnings (~early May), VFF will report fully consolidated PSF revenues, which will, finally, make VFF’s revenue directly comparable to peers (e.g., we believe VFF’s most relevant peer is APHA+TLRY, which derived 34 per cent of its 2020E revenue from cannabis). With PSF’s full consolidation squared away in 1Q21, we believe VFF’s EV/Revenue asymmetry with peers will become explicit, driving a material correction to the upside. As such, we view any stock price weakness on the back of today’s earnings print as an opportunity to add positions, taking advantage of this opacity- to-clarity arbitrage opportunity,” Sarugaser wrote.
Sarugaser also called Village Farms’ upcoming addition to the S&P/TSX Composite Index prior to trading on March 22 “another investor accessibility-driven catalyst for VFF.”
Along with his “Strong Buy 1” rating, Sarugaser has a price target $26.00, which at the time of publication represented a projected one-year return of 48.7 per cent.
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