Emerald and Village Farms!Friday’s analyst upgrades... Village Farms International Inc.’s (VFF-T) experience as one of North America’s largest greenhouse growers of premium quality tomatoes will service it well as it transitions into cannabis production, said Echelon Wealth Partners analyst Russell Stanley.
“We believe that dried cannabis will become more commoditized over time, which will require producers to become exceptional at delivering low cost and/or unique, high value products,” he said. “While a number of companies are positioning themselves as low-cost producers, few in this space have real experience in large-scale, low-cost agricultural production. VFF management has a unique, long track record in the produce market, where the Company has had to battle for margins, particularly in recent years. From a low-cost production experience perspective, VFF has been playing ‘playoff hockey’ for years now, while others are still learning to skate. We think this positions the company well for success in the cannabis space.”
Though shares of Vancouver-based Village Farms have jumped significantly since the June 6 announcement of a definitive agreement to form a joint venture with Emerald Health Therapeutics Inc. for large-scale, high-quality, low-cost cannabis production, Mr. Stanley feels the company’s stock still has room to run, initiating coverage with a “speculative buy” rating.
According to the terms of the agreement, Village Farms will contribute a 1.1 million-square foot greenhouse facility in Delta, B.C., which will be converted to a cannabis production facility for the non-therapeutic adult-use market with an estimated annual output of 18,750 kilograms.
“We understand that VFF management evaluated a number of LPs as potential partners, and following rigorous analysis, determined that EMH would be the best fit,” said Mr. Stanley. “VFF management expects to eventually be able to generate revenue of 10-15 times the level currently generated by its Canadian vegetable production, with EBITDA margins of 50 per cent or more on production costs of less than $1.00 per gram. Management stressed its continued commitment to the existing produce business, noting that success of the cannabis business could finance further expansion of the produce operations through consolidation opportunities.
“While the stock’s response to the JV announcement was positive (up 14 per cent in the following month), the share price improvement has accelerated over the past three months. While the entire cannabis space has performed very well (an adjusted average 3-month return of 92 per cent amongst the 30 issuers we track), VFF has more than doubled that with a 210-per-cent return, making it one of the best performing stocks in the space. We attribute the group performance to improving certainty with respect to provincial-level plans for legalizing the recreational market, with VFF’s outperformance likely driven by growing awareness of the Company’s strengths in high-tech/efficiency greenhouse production.”
Mr. Stanley also emphasized recent M&A activity with the sector should validates the cannabis market opportunities available to investors.