Raymond James analyst Rahul Sarugaser is excited about the growth potential for Village Farms International (Village Farms International Stock Quote, Chart, News, Analysts, Financials TSX:VFF), maintaining a “Strong Buy 1” rating while raising his target price from $26.00 to $27.00/share for a projected return of 202.4 per cent in an update to clients on Monday.
Founded in 1989 and headquartered in Delta, BC, Village Farms is one of the largest vertically-integrated greenhouse growers in North America with over nine million sq ft of indoor growing. The company currently has three businesses, namely, producing and distributing produce in the US, Canada and through partners in Mexico, producing and distributing cannabis products in Canada via its subsidiary Pure Sunfarms and a slate of international cannabis initiatives.
Sarugaser’s latest analysis comes after Village Farms acquired Colorado-based Balanced Health Botanicals for US$75 million ($30 million cash, $45 million in shares), bringing top-five American CBD market entity CBDistillery, along with its eCommerce platform, into the fold to help drive the sales of its end-to-end controlled supply chain of hemp-derived CBD and other wellness products.
“Since US federal legalization in late 2018, hemp-derived CBD products, as well as other cannabidiol-based products, have been part of our comprehensive strategy focused on high-value, high-growth plant-based consumer packaged goods opportunities in cannabis,” said Michael DeGiglio, CEO, Village Farms International in a press release.
“As a well-established, profitable leader in the US retail CBD market, Balanced Health is the right opportunity, at the right time, to take our next major step forward in anticipation of regulatory clarity that will propel the growth of this nascent market. Balanced Health provides a prudent means by which to invest in our cannabis strategy, providing immediate accretion to profitability, meaningful upside potential within the current Balanced Health business and multiple additional strategic opportunities to drive significant additional shareholder value over the medium and long term,” DeGiglio said.
Sarugaser sees significant benefits to both parties, with Balanced Health potentially boosting its sales by being able to leverage Village Farms’ grocery network including Wal-Mart, Trader Joe’s and Whole Foods among others, while Village Farms can use Balanced Health’s networks to pivot into the high-THC cannabis market while securing a key part of its supply chain moving forward.
“We view VFF’s direct entry into the ~$4.7 billion U.S. CBD market (~$16 billion by 2025) through today’s Balanced Health acquisition very positively, showing another successful step in VFF’s evolution into a proper CPG company, and having the potential to yield plenty of synergy with VFF’s existing operations,” Sarugaser said.
The company also released its second quarter financial results on August 9, reporting 38 per cent sequential net sales growth in its Pure Sunfarms product line to mark the fourth straight quarter of sequential growth in retail branded sales. Net sales for PSF hit $24.7 million compared to $9.4 million a year earlier, while adjusted EBITDA was $7.4 million compared to $1.8 million a year earlier and marking the company’s 11th straight quarter of positive EBITDA. (All figures in US dollars.)
The recent updates prompted Sarugaser to update his financial metrics and valuation data for Village Farms, as he now forecasts total revenue of $274 million for 2021, up from his initial projection of $259 million and marking a 61.2 per cent year-over-year increase. Sarugaser then projects revenue to more than double in 2022, with a new forecast of $608 million far outpacing his previous estimate of $363 million and marking a 121.9 per cent year-over-year increase.
Sarugaser also modified his adjusted EBITDA projections, as he now forecasts adjusted EBITDA of $10 million for 2021 instead of his initial $8 million estimate to produce a 25 per cent year-over-year increase and margin of 3.6 per cent, followed by a projected jump to $65 million, a 550 per cent year-over-year increase to produce a margin of 10.7 per cent.
Valuation data also received some adjustments, with Sarugaser lowering the EV/EBITDA multiple projections to 90.3x in 2020 (previously 95.6x), 65.3x for 2021 (previously 93.6x), and 10.4x in 2022 (previously 15.1x). Sarugaser also reduced his EV/Revenue multiple projections to 4x in 2020 (previously 4.2x), 2.5x in 2021 (previously 2.8x), and 1.1x in 2022 (previously 2x).
Sarugaser likes Village Farms opportunity in the still-developing US CBD industry.
“Since the passage of the 2018 Farm Bill, which legalized the interstate commerce of hemp-derived CBD products, VFF has been watching the U.S. CBD landscape closely, and even launched some early ventures in hemp cultivation. With regulatory uncertainty lingering (the FDA has yet to establish a proper framework for the lawful sale of CBD) and high relative valuations of the earliest acquired U.S. CBD companies by Canadian LPs, VFF decided to patiently plot its entry into the space, rather than rushing in,” Sarguser wrote.
“With some positive progress on the U.S. legislative and regulatory fronts, and with some rationalization of U.S. CBD company valuations, VFF seized the opportunity to acquire a large, and, importantly, profitable operator in Balanced Health,” he said. “With this move, VFF plants its flag in the U.S. CBD space ahead of a period that we expect will include vast Federal reform.”
Village Farms shares have yielded a 10.1 per cent loss in 2021 to date, with its high point coming on February 10 where it reached $19.37/share.