ATB CapitalIn a research report titled The Four-step Guide to Find Value in Canadian Cannabis, ATB Capital Markets analyst Frederico Gomes named Organigram Holdings Inc. and Village Farms International Inc. his top picks for LPs (a sector he thinks is “slightly overvalued”) citing “strong fundamentals, attractive upsides, and reasonable valuations (below fair industry multiples”). Mr. Gomes has an “outperform” rating and US$3.50 target for Village Farms. The average is US$5.24.
“VFF is gaining market share in flower as a result of its brand portfolio expansion,” he said. “The Company ranks well in segment diversification and geographical exposure, with material sales coming from the North American produce business and U.S. CBD. We view opportunities as VFF expands its presence in the value flower segment and in other product categories, notably in pre-rolls, where it is under-indexed. We also view upside in terms of geographical exposure as VFF commences exports to international markets (e.g., Israel and Germany) and starts operating in the adult-use market in the Netherlands (we expect sales to start in 2024).
“We believe VFF is one of the low-cost producers in Canada, with streamlined operations and a lean cost structure; the Company’s Canadian cannabis operations have been adj. EBITDA positive for the last 16 quarters. In terms of liquidity, we view VFF as having access to capital through its ATM facility, which should allow the Company to weather the near-term headwinds in the Canadian cannabis market with moderate dilution (already factored into our valuation).”
Mr. Gomes made his picks after evaluating the market opportunity, attempting to determine a fair industry multiple, identifying potential outperformers and seeking value.
“Canadian cannabis stocks have been a land mine for investors; however, while negative returns have been difficult to digest, valuations have become more reasonable. As the negative sentiment persists, the market is throwing out the baby with the bathwater. Certain companies are growing and getting closer to real profitability (through earnings and FCF, not only adj. EBITDA), though their share prices do not reflect their fundamentals,” he concluded