RE:Few comments some questions and a clarificationHi Robert, I don't know if gjis is what you are looking for. But this is last story on seeking alpha about VFF. Village Farms: From Growing Produce To Cannabis May. 4, 2018 9:11 AMVFFIF Summary Village Farms' existing operations consist of six operated produce greenhouse facilities in British Columbia and Texas. Announced its joint venture, Pure SunFarms, with licensed cannabis producer Emerald Health in mid-2017. Management's tone strike as overly optimistic and we rate the shares Underperform due to its lack of moat and low barrier to entry. Welcome to our Discover Cannabis series, where we publish in-depth research reports to introduce new companies not covered by us before. Overview Village Farms (OTCQX:VFFIF) has been listed on the TSX since 2006 and its recent foray into cannabis has brought investor attention into this sleepy stock. We think Village Farms has a unique positioning among the licensed producers given its long history of operating large-scale greenhouses in North America. The company claims itself to be one of the largest producers, marketers, and distributors of tomatoes, peppers, and cucumbers and operates its greenhouse facilities situated in British Columbia and Texas. The announcement of its joint venture with Emerald Health (OTCQX:EMHTF) has helped Village Farms to enter the cannabis scene. The share price gains following the announcement were partially reversed during the recent selloff but shares are still trading at almost triple the levels compared to where it was just over a year ago. Image result for village farms logo Operations Before getting into cannabis, Village Farms essentially operates a portfolio of six greenhouses totaling over 9 million square feet of growing space. The entry into cannabis occurred in June 2017 when the company announced a partnership with Emerald to form Pure Sunfarms. We have written extensively on the joint venture in the past, a quick recap: Pure Sunfarms has commenced physical conversion of the 1.1 million-square-foot Delta 3 greenhouse. Emerald expects the completion of the conversion of the first 250,000 square feet of the greenhouse facility and receiving Health Canada approval in February 2018. This facility is projected to yield about 75,000 kg of cannabis per year in 2020. Pure Sunfarms also has options to acquire from Village Farms two additional greenhouses with 3.7 million square feet, which could potentially yield an additional 225,000 kg of cannabis annually. At scale, the cost of production including depreciation is expected to be less than $1.00 per gram according to the management." Village Farms initially contributed a 1.1 million square feet greenhouse facility and Emerald will contribute a total of $20 million in cash to fund the project. Each party will hold 50% interest in the joint venture which is expected to be fully commissioned by 2020. It is worth noting that the JV would have an option to acquire two additional facilities from Village Farms. However, we think the likelihood of further expansion depends on the execution of the first project and supply picture of the cannabis market after 2020. (Village Farms website) Our Take: The company claimed in the slide below that the company could potentially address nearly half of the total estimated demand in Canada. We think management is likely to be overly optimistic here and, to the opposite of their goals, the slide laid bare the fact that cannabis production has low barriers to entry and producers could easily and quickly scale up production. If a produce grower could supply half of the total market, it is not hard to imagine a market that could easily be oversupplied. (Investor Presentation) Transformation? The stock chart below illustrates the transformation that Village Farms has undergone since its announcement of forming cannabis joint venture with Emerald in June 2017. The stock has woken up from years of muted performance to reach its all-time high in January. We think the underlying business of produce greenhouse is not very appealing with its low margin and weak growth profile. However, the transformation to add cannabis into the business has been painted with an overly optimistic brush, in our opinion. The company has greenhouse operation experience, but it does not have experience growing, handling, selling, and distributing cannabis. Its existing customer relationships and distribution channels are completely useless for cannabis, given all distribution will be controlled by the government to various degrees. The only advantage that Village Farms and its JV has is the experience of running greenhouses for produce products, which in our mind has little value given all major cannabis companies have embarked on building out their own greenhouse facilities tailored for cannabis production. Aurora (OTC:ACBFF) through its subsidiary, Larssen, is building specialized greenhouses for cannabis growing. Cannabis cultivation is relatively low-tech and not very capital intensive, resulting in basically no real advantage for Village Farms and its older and non-tailored greenhouse. Projections Unrealistic? The biggest risk for Village Farms is that its management has this rosy picture of them making 50% EBITDA margin once they convert their greenhouses to grow cannabis. For 2017, Village Farms only generated 5% EBITDA margin on its greenhouse operations. To suddenly expect over 50% margin on the same greenhouse assets only after converting them to growing cannabis is a little too premature, in our view. If Canada indeed becomes oversupplied, similar to other U.S. states that saw pricing fallen off a cliff, we would expect Village Farms to see margin more likely in-line with their existing operations. (Company presentation, Page 14) On P21 of the investor deck, management laid out an illustrative financial projection based on various sales price. We think management has omitted several essential cost elements and the projection is massively overstated. The EBITDA projections were derived by only deducting $1.0 per gram of production cost from the revenue. Management has conveniently left out other costs such as trimming, packaging, shipping, marketing etc. The $1.00 per gram is most likely cash costs of growing, excluding all the costs we just listed above based on our extensive research on the topic. For details please refer to our "The Complete Cannabis Guide #1: Production Cost". Besides the additional direct production costs, EBITDA should also include items such as G&A, admin, legal, accounting etc. Based on the management forecast, at $6.0 per gram, by 2020 the JV could be making $375 million of EBITDA on $450 million of revenue, implying an EBITDA margin of 83%! We think the projections are based overly simplified assumptions and are missing important cost elements, which led to these vastly overstated financial forecasts. (Company presentation, Page 21) The point we are making here is that by forming a JV with another mid-tier cannabis company to start building a licensed operation does not transform the company overnight. There is much to do on the execution front and we think management has not shown enough progress to de-risk the project. The projections somehow showed a lack of grasp on the cannabis business by Village Farms management. Projections based on EBITDA margin of as high as 83% is just not sound financial analysis and could mislead investors. We would prefer companies to stay away from giving EBITDA guidance like this, given the inherently unpredictable nature of the nascent industry. Putting Everything Together We think so far the management of Village Farms has been way too optimistic in their market view and projections. The company naively assumed that it could sell all its cannabis to the market, despite zero progress on securing distribution channels. The company's insiders own a quarter of the shares and it almost feels like the management is trying too hard to spin the cannabis story. We have long held the views that production capacities are easily replicable due to the low barrier to entry - the fact that a produce greenhouse operator claims to be able to supply nearly half of the entire Canadian market in just under two years is the best evidence! Management needs to focus on distribution and production placement - given the relatively easy task of converting its greenhouse. You could produce all the cannabis in the world but they won't mean a thing if you cannot secure distribution to end markets. Village Farms has no experience in selling cannabis, Emerald has a tiny medical presence, and Pure SunFarms just received cultivation license and is still months away from sales license. Village Farms has taken the path to becoming a pure grower in the cannabis space, which means that it will have the lowest margin and lowest moat compared to other players with provincial deals, brands, and customer relationships. When the market becomes oversupplied, the best chance of survival is your branding and product placement power. If for example, the market becomes oversupplied, other producers will prioritize their internal production and reduce wholesale purchases, leaving Village Farms more vulnerable to market supply and demand than others. The heightened market risk and positioning at the bottom of the value chain should warrant a lower, commodity-type multiple for this business. We rate the shares Underperform. We question the competitive positioning of Pure Sunfarms given that its existing greenhouse infrastructure does not represent a real barrier to entry. Its JV partner Emerald is a mid-tier licensed producer with a modest production profile and sold a mere $200,000 worth of cannabis during the latest quarter. We think management has been dreaming with their projections and forget to realize that their strategy is a low-value path that will lead to no pricing power, no customer relationships, and low margin. The existing operation generated an EBITDA margin of 5% in 2017, perhaps that is a more realistic place to start with. Author's note: Follow us to receive our latest articles and investment ideas in the sector. We also publish a widely read Weekly Cannabis Report, which is your best way to stay informed on the cannabis sector. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.