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The market’s got it wrong on Village Farms, says Beacon

Beacon Securities analyst Doug Cooper likes the latest quarterly numbers from cannabis stock Village Farms International (Village Farms International Stock Quote, Chart, News, Analysts, Financials TSX:VFF). In an update to clients on Tuesday, Cooper maintained a “Buy” rating but dropped his target price from $19.00/share to $12.50/share for a projected return of 130 per cent.

Delta, B.C.-based Village Farms 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 Sun Farms as well as a number of international cannabis initiatives.

Cooper’s latest analysis comes after Village Farms reported its fourth quarter financial results, with Cooper’s target drop coming from a lower multiple in relation to the company’s 2023 EBITDA forecast.

“We continue to believe that VFF is the ‘class’ of the cannabis industry and can envision a time in the not too distant future where it is #1 in Canadian retail, #1 Canadian medical and #1 in Europe,” Cooper said.

The company’s consolidated revenue came in at $72.8 million for the quarter to produce a 53 per cent year-over-year increase. Just over half of the company’s revenue mix ($38.4 million) came from produce, with another $26.9 million (37 per cent of the revenue mix) coming from Canadian cannabis and the remaining $7.5 million coming from US CBD and hemp. (All figures in US dollars.)

Village Farms also reported a strong consolidated gross margin at 30.3 per cent, driven by a 45 per cent margin in the Canadian cannabis sector, which Cooper notes to be growing as a percentage of consolidated sales. Meanwhile, the company’s EBITDA for the quarter came in at $5.3 million for a 7.3 per cent margin, with EBITDA from Canadian cannabis came in at $4.9 million, or an 18 per cent margin.

“In the fourth quarter, we once again saw strong year-over-year growth in sales and adjusted EBITDA, with positive adjusted EBITDA contributions from each of our Canadian Cannabis, US Cannabis and Village Farms Fresh (Produce) businesses for the second consecutive quarter,” said Michael DeGiglio, CEO of Village Farms in the company’s March 1 press release. 

“Our results were driven by the continued strong performance of our Canadian cannabis operations, with Pure Sunfarms’ leading market share in the dried flower category and successful new product introductions, as well as the first partial quarter contribution of Rose LifeScience in Quebec, driving a 50 per cent year-over-year increase in net revenue and 99 per cent increase in adjusted EBITDA,” he said.

Cooper also believes the company is in a solid position as it relates to cannabis in Ontario, which accounts for 41 per cent of an industry with a $4.6 billion run rate according to industry figures.

“The clear conclusion is that to be #1 in Canada, a company needs to be #1 in Ontario and #1 in flower. Pure Sun Farms is that company and continues to gain share,” Cooper said. “VFF’s low-cost capability and its capacity mean it could easily command 20 per cent+ of the Canadian market – especially now that it is in Quebec.”

The new quarterly results have prompted Cooper to make slight changes to his 2022 financial projections, raising his revenue target from $336 million to $351.5 million for an implied year-over-year increase of 31.2 per cent, accompanied by a new adjusted EBITDA projection of $49 million (previously $44.4 million) to imply a margin of 13.9 per cent.

Cooper also introduces 2023 projections in his analysis, setting his revenue target for the year at $386.2 million for a potential year-over-year increase of 9.9 per cent, accompanied by an adjusted EBITDA estimate of $55.2 million for an implied margin of 14.3 per cent.

From a valuation perspective, Cooper projects the company’s EV/Sales multiple to drop from 1.7x in 2021 to 1.3x in 2022 and 1.2x in 2023, with similar forecasts for the EV/EBITDA multiple (32.1x in 2021 to 10.5x in 2022, then to 8.4x in 2023).

In assessing Village Farms’ overall position, Cooper pointed to industry peers like Canopy Growth and Aurora Cannabis, who were unable to make the most of first movers advantage in the Canadian cannabis market.

“One of the only success factors that investors should have gleaned over the past two years of the rec legal market is that operators must be a low-cost producer,” Cooper said. “VFF is so by a factor of 50 per cent or more yet still manages to get the industry’s highest margins. Yet despite having a share of the Canadian rec market almost equivalent to WEED and ACB combined, VFF’s market cap is about ten per cent of the combined caps of WEED and ACB, indicating that something is badly mispriced.”

Like the rest of the cannabis space, VFF has not yielded bountiful profits for investors over the last 12 months at a 64.6 per cent loss, with a 20.1 per cent loss since the start of 2022. The stock climbed to $17.48 on March 15 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.


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About The Author /

Geordie Carragher is a staff writer for Cantech Letter
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