In a recent note, senior analyst Pablo Zuanic digs into the financial standing and valuation of Village Farms (NASDAQ:VFF), the only cannabis company anointed by the Drug Enforcement Agency (DEA) as one of the 25 DPs ("designated participants") in the administrative hearing for the rescheduling of cannabis to Schedule III.
According to Zuanic, the company experienced temporary sales disruptions in the second half of the year, primarily due to stockouts caused by strong first-half demand. These disruptions are expected to normalize by the first quarter of 2025. Although the overall demand for Canadian recreational cannabis is slowing down, Village Farms has been able to increase prices for some SKUs.
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Global Reach And Scale
Beyond Canada, Village Farms is focused on growing its international business, particularly in Germany, Australia, and the UK. It plans to allocate Canadian production based on return on investment (ROI) and may consider minority investments in international markets.
The company will prioritize its branded domestic cannabis business and international sales. It will reduce B2B sales for domestic purposes and allocate more output to its branded products.
Branded sales margins are recovering to the 30-40% range and B2B margins are increasing due to higher prices and increased overseas demand. Zuanic noted approximately one-third of domestic B2B sales are re-exported to Germany.
Read Also: Prohibitionist Group Denies Collusion Allegations Ahead Of DEA Cannabis Rescheduling Hearing
Market Share
Hifyre data for October and November shows a sequential improvement in the Canadian recreational cannabis market, with a year-over-year growth of 6.7%. However, Village Farms experienced a deceleration to 1% year-over-year growth.
- Among the top 10 players, Tilray (NASDAQ:TLRY) (-21%), Decibel (OTC:DBCCF) (-23%), and Canopy Growth (NASDAQ:CGC) (-21%) experienced a decline in growth. On the other hand, Cannara (OTC:LOVFF) (+67%) and WeedMD (+23%) saw significant growth.
- OGI (NASDAQ:OGI) (+13%), Auxly (OTC:CBWTF) (+33%), Motif (+10%), and Cronos Group (NASDAQ:CRON) (+4%) also exhibited positive growth.
- In terms of November market share, Tilray (TLRY) (9.1%) held the largest share, followed by OGI (7.0%), VFF (6.2%), Auxly (5.6%), Motif (5.3%), Cronos Group (5.1%), Decibel (4.7%), Cannara (4.0%), WeedMD (2.9%), and Canopy Growth (2.3%).
Read Also: Village Farms Quarterly Revenue Grows 20% YoY As The Cannabis Company Doubles International Sales
Valuation
Zuanic argues that Village Farms' stock is undervalued due to its complex business model and gradual growth strategy, despite its strong performance in the Canadian cannabis market, international expansion and potential US opportunities.
He calculates the company’s enterprise value (EV) to be around US$120 million. This valuation implies a low multiple of 0.4x current sales estimates and 5.6x EBITDA.
Zuanic says the market is not fully recognizing the value of VFF’s assets.
If we strip out the value of the produce business, US CBD operations and Texas greenhouses, Zuanic suggests that the remaining valuation for the cannabis unit is around US$19 million, or 0.1x estimated 2025 sales and 3x EBITDA. This is significantly lower than the valuations of other major cannabis companies like Tilray and Aurora Cannabis (NASDAQ:ACB).
