Ahead of third quarter results from Canadian cannabis company Village Farms International (Village Farms International Stock Quote, Charts, News, Analysts, Financials NASDAQ:VFF), Raymond James analyst Rahul Sarugaser maintained his “Strong Buy 1” rating in a Wednesday update to clients, calling Village Farms the strongest operator in the sector.
Delta, BC-based Village Farms is a vertically integrated greenhouse grower with more than nine million square feet in greenhouses. The company has three primary businesses in produce both in the US and Canada and through partner growers in Mexico, in cannabis in Canada via its now 100 per cent ownership of BC-based licensed producer Pure Sunfarms and in international cannabis and related products through part-ownership of Australia-based Altum and DutchCanGrow in the Netherlands. The company is also primed for business in the US with 5.7 million sq ft of greenhouses in Texas ready to convert to cannabis cultivation if and when cannabis reform comes about at the federal level.
Village Farms, which is set to deliver third quarter earnings on November 9, saw Pure Sunfarms sales grow by 136 per cent year-over-year to $24.7 million in its second quarter, with adjusted EBITDA coming in at $7.4 million. Meanwhile, the company was able to report that it remained the top-selling brand of dried flower products at the Ontario Cannabis Store, making it 21 months in that position as well as being tops in Alberta and BC for dried flower. (All figures in US dollars except where noted otherwise.)
“Pure Sunfarms remains well positioned to be the long-term market leader in the Canadian cannabis market as many industry participants continue to shift their strategies or combine businesses in an attempt to compete successfully. Our continued market share, leadership and growth, including our first ever quarter as the top-selling Licensed Producer in Ontario, gives us even more confidence that we will achieve our stated goal of 20 per cent market share in dried flower in Canada,” said Village Farms CEO Michael DeGiglio in an August 9 press release for the company’s Q2 2021 results.
In his report, Sarugaser related how VFF is staying steady with its number five position nationally in terms of market share at seven per cent of the adult-use cannabis market, this coming at a time when many of its larger-cap peers have seen their market shares decline with increasing competition in the cannabis space.
Sarugaser called Village Farms the most capital-efficient, lowest-cost producer of high-quality cannabis in Canada, quoting its all-in cost of goods sold of $0.70 per gram, which makes VFF “a branded-product juggernaut, as well as an attractive high-margin B2B supplier to domestic and international markets,” the analyst said.
This has allowed VFF to rapidly cannibalize its much ‘larger’ peers’ (larger only by market cap, not by Rev., efficiency, or scale of operations) share of the adult-use branded-product market; capturing 7.1 per cent (up +1.7 per cent from 1Q21), while its four largest market cap peers, Tilray, HEXO, Canopy and Aurora, own 15.4 per cent, 12.2 per cent, 9.9 per cent and 3.8 per cent, respectively, each having lost (>3 per cent) market since 1Q21,” Sarugaser wrote.
“To be clear, VFF is not a farming company. VFF is a highly sophisticated manufacturing operation that produces some of Canada’s best mass-market cannabis, which it uses to build excellent branded products, thus engendering strong customer demand (as evidenced by VFF’s Pure Sunfarms Pink Kush being Canada’s #1 selling SKU by a long shot),” he said.
The cannabis space has not been in the market’s favour over the past nine or ten months and stocks have suffered. Nonetheless, Sarugaser sees Village Farms as an exception to the rule, saying the stock’s a Buy even in these tough times. With his “Strong Buy 1” rating, the analyst reiterated his $27.00 target price for VFF, which at the time of publication represented a projected one-year return of 251 per cent.
“While we expect the Canadian cannabis sector, broadly, to remain in the doldrums until we see some major legislative action in the U.S. relating to cannabis reform, we view VFF as a strong buy relative to Canadian peers. Its massive EV/Rev. and EV/EBITDA asymmetries versus peers remains, and we see no stronger operator in the sector,” Sarugaser wrote.
“We believe VFF’s ability to produce tremendous volumes of high quality cannabis at such low cost vs. peers will continue to win VFF market significant share of both the branded adult-use market and wholesale cannabis markets,” he said.
By the numbers, Sarugaser is calling for Village Farms to hit full 2021 and 2022 revenue of $264 million and $577 million, respectively, and 2021 and 2022 EBITDA of $4 million and $59 million, respectively. His EV/EBITDA multiples on 2021 and 2022 numbers are 155.1x and 10.4x, respectively, and his EV/Revenue multiples for 2021 and 2022 are 2.3x and 1.1x, respectively.
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