Village Farms is your best bet in cannabis, says Raymond James

In the cannabis sector, Raymond James analyst Rahul Sarugaser is still big on Village Farms International (Village Farms International Stock Quote, Chart, News, Analysts, Financials NASDAQ:VFF) but with the overall sentiment still negative on the space, Sarugaser has adjusted his outlook on the stock. In an update to clients on Monday, Sarugaser maintained a “Strong Buy 1” rating while cutting his target price from $27.00 to $19.00 for a projected return of 295 per cent.

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 as a model update and preview to Village Farms releasing its next quarterly financial results, which aren’t expected until March, though his target drop is intended to align with the negative narrative currently surrounding the cannabis sector.

Ahead of those results, Sarugaser projects the company’s cannabis and US CBD revenue to increase by ten per cent sequentially, though he also projects the company’s produce revenue to drop 12 per cent for a relatively flat quarter (2.5 per cent sequential growth) of $70.7 million.

He expects the first quarter of 2022 to be significant for Village Farms, as he projects the company’s cannabis and CBD revenue total to pass produce revenue for the first time.

“We see this as an opportunity for clients to establish positions before the market comes to appreciate that VFF is now a cannabis company first, and a produce company second,” Sarugaser said.

Sarugaser also notes that Village Farms has maintained a relatively steady market share between six and seven per cent, though he estimates growth to nine per cent by the end of 2022, potentially putting it past industry competitors Canopy Growth and HEXO.

One of the company’s most notable event since its last financial results were released came in November, when Village Farms acquired a 70 per cent stake in ROSE LifeScience, a leading vertically integrated branded cannabis producer, supplier and commercialization expert in Quebec, marking the company’s entry into a market through an entity company management identifies as prudent and strategic.

“ROSE adds an exceptional group of Québec-based experts to our Canadian cannabis operations,” said Michael DeGiglio, CEO of Village Farms in the company’s November 15 press release announcing the acquisition. “The team has a proven track record of success, and shares our belief in the importance of cultivation excellence, as well as the advantage of innovation and continuous improvement. We look forward to building on ROSE’s strong foundation in the Québec market, with a long-term commitment to the Company’s Québec heritage.”

With his target drop in place, Sarugaser has also made changes to his financial projections, forecasting a slight improvement in 2021 revenue from $264 million to $266 million for an implied year-over-year increase of 56.5 per cent. However, Sarugaser has slashed his 2022 revenue projection from $577 million to $392 million, though it still represents a year-over-year increase of 47.4 per cent. (All figures in US dollars.)

The biggest correction Sarugaser makes to his 2022 estimates comes in the first quarter, where he now forecasts $73 million in revenue, a significant reduction from the previous projection of $264 million.

Sarugaser has also revised his EV/Revenue multiple projections, forecasting a drop from 2.4x in 2020 (previously 3.6x) to a projected 1.6x in 2021 (previously 2.3x), then dipping again to a projected 1.1x in 2022.

Sarugaser projects improvements to the company’s EBITDA over that time period, with a new forecast of $13 million in 2021 (previously $8 million) for an implied EBITDA margin of 4.9 per cent. From there, Sarugaser maintains a $59 million EBITDA projection for 2022, though with the lower revenue forecast, the projected margin grows from 10.2 per cent to 15.1 per cent.

Accordingly, Sarugaser’s EV/EBITDA projections drop from the projected 55.3x in 2020 (previously 81.6x) to a new estimate of 33.1x in 2021 (previously 155.1x), then dropping again to a projected 7x (previously 10.4x) in 2022. 

Overall, Sarugaser believes Village Farms is in a good place when the cannabis sector comes back around.

“Given the significant asymmetry between Village Farms’ strong revenue growth and its uncatchable industry-leading COGS, we view Village Farms as the most de-risked company among its peers, such that when the sector recovers, we believe Village Farms will be the best positioned company among its peers to not only ride the eventual sector recovery, but also provide greater long-term value for its shareholders,” Sarugaser said.

Village Farms’ stock is down over the last 12 months by about 58 per cent with a 23 per cent loss since the start of 2022. The stock climbed to $19.37 on February 10 for its 52-week high, though it’s come down significantly since then, hitting a 52-week low of $4.66/share on January 27.