Cannabis stock Village Farms has target cut by Roth Capital

Gains in market share in the Canadian cannabis trade are looking good on licensed producer Village Farms International (Village Farms International Stock Quote, Charts, News, Analysts, Financials NASDAQ:VFF). That’s according to Roth Capital Partners analyst Scott Fortune, who on Thursday reported on VFF’s latest quarterly numbers. Fortune maintained a “Buy” rating on the stock but lowered his 12-month target price from $9.00 to $6.00 on the challenging macro environment along with derating in the cannabis space.

CPG company Village Farms has a North American produce business, a cannabis business in Canada through subsidiary Pure Sunfarms and a CBD business in the US. The company announced its third quarter earnings on Wednesday, coming in with consolidated sales of $71.1 million, down two per cent year-over-year, and consolidated adjusted EBITDA of negative $2.2 million compared with positive $6.9 million a year earlier. (All figures in US dollars.)

Breaking down the topline, VFF’s cannabis business saw net sales rise 14 per cent year-over-year to $35.5 million with positive adjusted EBITDA of $5.4 million, while produce sales were $35.5 million compared to $41.0 million a year earlier and adjusted EBITDA was negative $4.9 million.

Management said Produce’s decline was due to lower volumes; meanwhile, Pure Sunfarms retained its position as the best-selling dried flower brand across Canada. 

“The strong performance in our Canadian Cannabis business in the third quarter reflects the successful execution of our growth strategy and investments as we achieved another sales record, outstanding growth in retail sales, and our 16th consecutive quarter of positive adjusted EBITDA,” said Michael DeGiglio, CEO of Village Farms, in a press release.

Looking at the Q3, Fortune said the $71.1 million topline was under the consensus estimate at $76.3 million, with the analyst pointing to headwinds in elevated freight, packaging and other inflationary pressures along with a virus hitting VFF’s tomato crop. 

Fortune is upbeat on the cannabis industry, however, and sees most of Village Farms’ revenue growth and earnings contribution to be coming from Pure Sunfarms, new brands and its 70 per cent ownership stake in Quebec-based producer Rose LifeScience.

“We remain constructive on the cannabis business with SKU innovations to drive near-term growth while international revenue should begin to ramp in 2023,” Fortune wrote.

“We estimate cannabis to continue to be greater than 50 per cent of VFF sales, buoyed by slight market share gains in Canada adult-use and initial new international sales in the EU ramping into 2023. As a result of produce pressures, we adjust ’22/’23 Revs/EBITDA to $296.8 million/$328.8 million and ($19.1 million)/$22.1 million,” he said.