All figures are net to Village Farms,and stated in $CAD to facilitate comparison, unless otherwise stated.
Emerging and under-the-radar future cannabis Goliath, Village Farms International (VFFIF, TSX: VFF) is significantly and unjustifiably undervalued VS industry peers using common analyst metrics.
Through it’s Pure Sunfarms joint venture, Village Farms will own a net 2.4 million square feet (55 acres) of greenhouse space in British Columbia, Canada, capable of producing 150,000KG of high quality cannabis at an estimated cost of under $1.00 per gram.i These figures place it among the leaders in cannabis production with costs less than 1/2 the ~$2.00 industry average.i With over 30 years of growing experience, the team at Village Farms is well equipped to compete with any of the cannabis majors. Bringing further depth to the operation, Village Farms benefits from cannabis-specific expertise and pharmaceutical grade genetics through it’s JV partner Emerald Health Therapeutics.
“ When a company is selling a product with commodity-like economic characteristics, being a low-cost producer is all-important.” -Warren Buffett
In addition to it’s Canadian operations, Village Farms solely owns 5.7 million square feet (130 acres) of greenhouse space in Texas. As can be seen in the comparisons to follow, I believe that the current share price reflects little to no value given to the Texas assets, despite a rapidly changing climate toward legalization in the USA.
[Sen. Cory Gardner, (R., Colo.) on Thursday joined Sen. Elizabeth Warren (D. Mass.) in introducing a bill that essentially would allow states to pass their own marijuana laws without interference from the federal government.
Mr. Trump on Friday reiterated his support for Mr. Gardner, saying “I know exactly what he’s doing, we’re looking at it, but I probably will end up supporting that, yes”] - Wall Street Journal, June 10, 2018
With the potential to more than triple the amount of cannabis grow space available to the company through rapid conversion of existing US greenhouses, the implications for investors is staggering.
What is the potential upside for shares of Village Farms?
The below table compares Village Farms against 3 of the top Canadian cannabis companies (majors) on 2 highly relevant metrics: F2020 EV/EBITDA and Market Capitalization/ Production Capacity. The following comparisons assume that options on all 3 phases of the Pure Sunfarms joint venture will be executed given their deep inherent value and operational in 2020. The estimates below for Village Farms assume a conservative $4 per gram selling price, despite a current national average of $8.24 per gram.ii Furthermore, the 5.7 million square feet of greenhouses owned by Village Farms in the United States are a free option on top of these estimates.
As can be seen above, based on the widely used EV/ 2020 EBITDA multiple, Village Farms is trading at a fraction of the average, implying tremendous upside to the current $5.60 USD share price.
Three frequent counter arguments advanced are as follows:
Branding - The majors are investing in branding and counting on consumers to be able to recognize and have a strong preference for name brand cannabis. However, in a recent survey by Deloitte, only 16% of respondents stated that branding would persuade them to purchase legal cannabis over existing unbranded illegal varieties. ii The 3 main factors influencing respondents were quality, price, and safety ii, all of which are very well suited to Village Farms strengths.
Supply Agreements - The majors have announced many valuable supply agreements both domestically and internationally which provide sales outlets for their production. Village Farms is playing catch up in this regard, yet it recently announced a major supply agreement for 40% of it’s entire production through 2020 to Emerald Health Therapeutics. It is likely that Village Farms will initially supply other LP’s with wholesale cannabis to meet their own demands, and as it’s Pure Sunfarms JV matures, it will strike it’s own retail level supply agreements that garner higher prices.
Value-added Production - The majors have various degree of capabilities to add value downstream through higher margin products (oils, drinks, pills, creams etc). Through Pure Sunfarms, Village Farms has stated it’s intent to become fully vertically integrated and aggressively pursue these value added avenues.
Regardless of the arguments and counter arguments above, the comparison tables in this report assume only a $4.00 wholesale flower price is received by Village Farms, which does not depend on branding, retail agreements, or value-added processing. These same comparison tables already include analyst assumptions of much higher average selling prices for the products sold by Canopy, Aurora and Cronos.
Viewing things from a different angle, below are some recent acquisition comparables stacked up against Village Farms:
Again, recent acquisitions in the cannabis space further highlight the disparity between industry valuations and the potential of Village Farms.
ADDITIONAL RELEVANT INDICATORS
Village Farms also compares well on a number of other metrics such as; book value, short interest and shares owned by management:
Worthy of note is the significant management ownership compared to the majors as shown above. Village Farms management owns over 10x the amount of shares compared to the majors demonstrating significant faith and commitment in the future of the company.
SELL SIDE ANALYST ESTIMATES
In support of the bullish stance taken here, well regarded industry analyst Russell Stanley, CFA, MBA, of Echelon Wealth Partners recently released a report on Village Farms with a $15.00 12 month target price.iii The report only considers the previously announced 1.1 million square feet Phase 1 (of 3 under option) for Village Farms JV, Pure Sunfarms. While based on only 23% of the square footage available to Pure Sunfarms, Stanley states that his target price will rise to $19 per share should management achieve the higher end of their estimates for this first phase alone.iii
Village Farms International (OTC: VFFIF, TSX: VFF) has a clear path to generating significant shareholder value with its Canadian cannabis operations, and an extremely valuable option on US legalization with its substantial greenhouse acreage south of the border. Village Farms’ low cost business model, decades of experience, and ability to quickly ramp up production through conversion of existing greenhouses provide a significant margin of safety to investors and a looming threat to competitors. The current share price of Village Farms is a significant discount to both the industry and the majors highlighted above providing both hard core value and incredible upside potential to investors. In my opinion, Village Farms is the must-own cannabis stock of 2018.
iVillage Farms International May 2018 Investor Presentation:
iiDeloitte 2018 Cannabis Report:
iiiEchelon Wealth Partners Village Farms Analyst Report Published June 1, 2018
Disclosure: I am/we are long VFFIF.