Village Farms is Canada’s heavyweight cannabis champ, Beacon says

Following the company’s most recent financial results, Beacon Securities analyst Douglas Cooper remains bullish on Village Farms (Village Farms Stock Quote, Chart, News, Analysts, Financials Nasdaq:VFF)

On August 9, VFF reported its second quarter results. The company posted EBITDA of $1.3-million versus last year’s negative $10.3-million, a significant improvement. Sales, meanwhile, decreased seven per cent to $77.2-million.

“The continuing standout performance of our Canadian Cannabis business is the result of a deliberate strategy and execution to win in Canada’s challenging market environment, CEO Michael DeGiglio said. “In the last year-and-a-half we have launched seven new brands – the latest, Super Toast, last month – and more than 300 new SKUs. At the same time, we are realizing continuous production efficiencies to support future growth in Canada and internationally. Market share growth and leadership in Canada require continuous, consumer-focused innovation, and with the rock-solid foundation we have built, our undivided attention is on leveraging our leading position in dried flower and top brands to deliver new strains, products and formats that meet the evolving preferences of the cannabis market. Finally, we are using our extensive experience in Canada to aggressively pursue international opportunities, via both export and in-country operations, delivering more than a 200% year-over-year growth in Canadian dollar sales to international markets during the second quarter.”

In a research update to clients August 11, Cooper maintained his “Buy” rating and one-year price target of (US) $2.50 on Village Farms, implying a return of 198 per cent at the time of publication.

The analyst says consolidation is the name of the game in the Canadian cannabis space.

Canadian cannabis top five companies

“We believe these 5 companies represent ~40%+ of the Canadian recreational market. Of them, we note that Aurora’s (ACB – T, NR) sales, while +5% y/y were down 6% q/q. Furthermore, ACB’s primary focus is the Cdn medical market. Cronos (CRON – T, NR) is not a real business in our opinion but rather a “cash box” and actually trades below its cash value. It would not surprise us if Canopy (WEED – T, NR) shut-down or sold its Cdn cannabis operations to focus on beverages. Organigram’s (OGI – T, NR) momentum seems to have waned and Tilray’s (TLRY – US, NR) focus is clearly on the US craft beer market. In fact, we believe TLRY’s reported Cdn rec sales are over-stated due to the HEXO acquisition and the y/y declines are likely greater than stated in the table. And to top it off, none of the aforementioned companies have positive EBITDA within the Cdn rec market but rather are subsidizing that segment through either higher margin medical and/or international sales or just losing money.”

Cooper says Village Farms is now the heavyweight champion of the space.

“While it will not quite be like Connor MacLeod from the movie Highlander said (“There can only be one!”), the Canadian market will likely continue to consolidate to ~3 main companies,” he said. “Being the low-cost producer with ample capacity and an improving balance sheet, VFF will be that leader of the pack. No material changes to forecast.

Cooper believes VFF will post Adjusted EBITDA of $100,000 on revenue of $271.1-million in fiscal 2023. He expects those numbers will improve to EBITDA of $12.2-million on a topline of $282.8-million the following year