The Analyst
In a recent analyst note, Pablo Zuanic from Cantor Fitzgerald maintained a rating of Overweight for Village Farms Int'l Inc. (NASDAQ:VFF) and lowered the 12-month price target of the stock to US$6.75 from $7.30, on reduced estimates. However, Zuanic finds value in the stock.
The Thesis
Zuanic explained that although VFF reported solid cannabis sales growth for the June quarter, the positive sentiment was offset by continued challenges in the tomato business, disclosure of a $50 million equity facility, and a $30 million impairment.
“We see value here. Using an SOP approach, we calculate the VFF cannabis business is valued at only 0.3x CY22 sales compared with 1-2x for most peers and 5-6x for the likes of Canopy Growth Corp. (TSX:WEED) (NASDAQ:CGC) and Tilray (NASDAQ:TLRY), Zuanic said. “We think the potential divestiture of one of the Texas greenhouses could help unlock value.”
The analyst added that sentiment could also improve export growth and deal-making in Europe, “plus a successful rollout of new brands.”
Zuanic highlighted that sales increased 37% sequentially (+20% YoY), with branded sales up 30%, and bulk (trim and other) up almost 60%, accounting for 29% of cannabis sales in 2Q22. At the same time, he acknowledged that the production unit continues to face tough market conditions such as oversupply, lower prices, and supply chain pressures, “with adj EBITDA worsening to -$10.3Mn vs. -$6.2Mn in 1Q22 (sales were up 14% seq; gross margins went from -10.4% to -19%).”
“The US CBD piece saw sales fall 18% seq, and the division entered negative EBITDA margin territory (-10.9% vs. +8.2% in 1Q22 and +22.5% in 4Q21); partly due to the operating deleverage effect, CBD EBITDA margins dropped almost 19pt seq (while gross margins only fell 70bp),” Zuanic added.
An Encouraging Outlook
According to Zuanic, Village Farms’ cannabis sales should ramp up in the second half of the fiscal year “on the back of new launches, and export growth,” to Germany, Israel and Australia. He noted The Original Fraser Valley Weed Co., Pure Sun Farms' new recreational weed brand, offering bulk dried flowers grown in British Columbia for price-conscious consumers, could drive sales up. The brand is aimed at the value segment (15-20% below Pure Sun Farms average prices), which accounts for 45% of the market in BC and 20% ON, according to management. “Management is encouraged by consumer response so far and by the new listings garnered with the boards and retailers,” he said.
Pure Sunfarms is now present in ten provinces and territories, which cover 98 percent of total legal cannabis sales in Canada. EU GMP certification allows Pure Sunfarms to export EU GMP-certified medical cannabis to international markets.
“Outside cannabis, the company is evaluating strategic opportunities for the produce business (while we do foresee a full-blown exit, we would not be surprised if VFF sold one of the Texas greenhouses),” Zuanic said.
Meanwhile, VFF has entered into a $50 million equity facility, which may help fund the Dutch expansion, working capital and M&A. Pure Sun Farms now owns 85% of Elli, one of ten Dutch licensees that will supply select coffee shops in that market as part of a pilot program. “The facility may have 6 tons of capacity eventually; we only see revenues there starting by 1Q24,” Zuanic added.
Valuation And Rating Analysis: ’A Higher Multiple Is Warranted’
Taking the 8/9 intraday price, the share count of 88.6 million, 2Q22 net debt of $40 million, and leases of $9 million, Zuanic calculates Village’s EV at $295 million (CA$379 million).
“If we assigned zero value to produce, to the Texas greenhouses, and to the recently acquired CBD unit, this would value the cannabis piece at2.7x CY22 sales. Peers like Tilray and Canopy Growth trade at 5-6x CY22 sales. But, in our view, there is also value in the non-cannabis assets,” Zuanic explained.
For valuation purposes, Zuanic takes the 70% stake in the US CBD unit at $75Mn (purchase price), the Texas greenhouses at $130Mn, and attributes a $64Mn valuation to the existing produce unit (taking 8x on normalized EBITDA of $8Mn).
“EV for the cannabis piece is only $49Mn, or 0.3x our projected CY22 cannabis sales of $111Mn. On the domestic scale and sustainable momentum (owing to low-cost production) and given peer valuations, we think a higher multiple is warranted. Using an SOP approach and taking the THC cannabis unit at 2.5x sales (vs. 3x before, due to sectoral derating), we arrive at a price target of US$6.75 (C$8.37) by Aug 2023 vs. US$7.30 before,” Zuanic concluded.
Photo by Karsten Würth on Unsplash.
