Raymond James Citing limited near-term prospects for cannabis reform south of the border, Raymond James analyst Rahul Sarugaser lowered his recommendation for Village Farms International Inc. to “market perform” from “outperform” ahead of the March 9 release of its fourth-quarter 2022 financial results.
“While VFF’s Canadian cannabis operation, Pure Sunfarms, continues its impressive trajectory of profitable growth — No. 2 LP by market share during 4Q22 , second only to TLRY, which today sports a market cap 17 times that of VFF — we continue to see VFF’s fresh produce and U.S. CBD operations dragging on profitability, as they have been since 1Q22, pulling VFF’s consolidated earnings into EBITDA-negative territory every quarter hence,” he said. “So, while Pure Sunfarms continues to outperform in the Canadian market—driving +EBITDA since its inception — and began shipping cannabis internationally during 1Q23, we cannot ignore the real challenges facing VFF’s fresh produce business (cost inflation + inflexible customer set) and U.S. CBD business.”
Mr. Sarugaser thinks investors should be increasing concerned with the Vancouver-based company’s ability to “withstand the macro-driven losses on its produce business to realize its option on U.S. cannabis legalization.”
“Increasing cash flow from Canadian cannabis should help, so should proceeds from the company’s recent US$25-million raise (plus the option of U.S. greenhouse asset sale-leasebacks), but the market will need clarity on when the produce business will return to breakeven performance before it begins giving VFF credit for its very successful cannabis business (we still view VFF as one of the strongest operators in Canadian cannabis, and one of the 4 or 5 groups that will ultimately supply cannabis material for approximately 80 per cent of Canadian consumers),” he said. “Beyond this, supposing cannabis reform becomes a presidential election issue, material setbacks in U.S. cannabis reform have pushed the time horizon for VFF to convert its Texas-based greenhouses from vegetable to cannabis plant production out to mid-2024, at earliest, in our view.
“In light of a challenging macro (persistent inflation, growth names out of favor), prolonged timelines around U.S. cannabis reform, profitability challenges affecting businesses that drive more than 50 per cent of VFF’s Rev., relatively limited cash, and a shareholder base still smarting from the dilution brought about by VFF’s US$25-million unit offering, we acknowledge the significant overhang on this stock, and believe it will move sideways until one or more of these issues resolve; as such, we reduce our rating.”
After updating his financial projections and incorporating the dilution brought by its recent US$25-million equity offering, Mr. Sarugaser cut his target for Village Farms shares to US$2.50 from a previous Street-high of US$11. The average is US$4.46.