Village Farms will be the big winner in the cannabis sector, Beacon says

Its fourth quarter results are in the books and Beacon analyst Doug Copper still thinks there is a lot of money to be made on Village Farms (Village Farms Stock Quote, Chart, News, Analysts, Financials NASDAQ:VFF)

On March 13, VFF reported its Q4 and fiscal 2023 results. In the fourth quarter, the company posted Adjusted EBITDA of $0.7-million on sales of $74.2-million, a topline that was up seven per cent year-over-year.

“Our Canadian Cannabis business remains the undisputed leader in that market, with record sales and another quarter of positive adjusted EBITDA and cash flow in the fourth quarter,” said Michael DeGiglio, President and Chief Executive Officer. “We reclaimed the number two national market share rank across all categories and are steadily closing the gap on the top position. Record retail branded sales were complemented by another especially strong quarter for non-branded wholesale sales. In our non-branded wholesale channel, we took advantage of improved supply conditions and pricing created by the shift of many of our peers to asset light models, significantly reducing our non-brand-spec inventory. While these close out sales are temporarily affecting gross margin and adjusted EBITDA, they are generating additional cash flow, and will support more efficient, higher cash conversion inventory turnover this year and beyond.”

Cooper summed up why he thinks Village Farms is in a very good place right now.

“We have made a small change to our FY24 forecast, reducing our EBITDA estimate to $12.5 million from $17 million, mostly to reflect a break-even produce segment (we were small positive) and slightly higher costs in its cannabis segment (mostly increased “data sales” costs to the Canadian retailers). Nevertheless, we believe the company has never been in a better competitive position and the Canadian cannabis industry fundamentalsare improving. We have long noted that there will ultimately be only a handful of “winners” in the C$6 billion industry. It is beyond a doubt that VFF will not only be one of them, but the largest. Trading at just 7x our FY24 EBITDA forecast and likely less than 2x upon tax reform with a strong balance sheet, we continue to believe the risk-return is exceptional.

In a research update to clients March 13, Cooper maintained his “Buy” rating and (US) $2.50 target on VFF, implying a return of 252 per cent at the time of publication.

Cooper thinks VFF will generate Adjusted EBITDA of $12.5-million on revenue of $296.7-million in fiscal 2024.

“It finally appears that the Canadian cannabis market is restoring some semblance of normalcy with industry capacity down and prices stabilizing. This, coupled with the potential for tax reform, could result in the “break-out” year for VFF’s cannabis sector, not only in terms of EBITDA but net income,” Cooper added.