With Village Farms’ JV expected to be among the top five cannabis producers, the valuation of Village Farms International, Inc. (TSX:VFF) in terms of market cap/gram looks enticing
SmallCapPower | March 20, 2018: Village Farms International, Inc. (TSX:VFF), for more than three decades, has been a leader in large-scale and low-cost greenhouse growing of agricultural produce such as tomatoes, cucumber and pepper. The formation of a cannabis joint venture, ‘Pure Sunfarms’ in June 2017 became a transformational opportunity for Village Farms International. The JV is expected to be one of the largest cannabis greenhouses in Canada by 2020, as it should position Village Farms International to capture a decent share of the large impending recreational cannabis opportunity.
The project’s plans imply the possibility to become one of the top five cannabis producers. In terms of valuation, Village Farms International trades at a market cap/gram of $9.0, a discount to peers, which trade at ~$29.0/gram for the top 10 licenced producers.
Investment thesis
- Leader in greenhouse growing across North America
- Cannabis JV with Emerald Health Therapeutics – A transformational opportunity
Large-scale, vertically-integrated greenhouse grower across North America
Village Farms International is one of the largest greenhouse growers and distributors of fruits and vegetables across North America. The Company operates a total of seven facilities spanning 250 acres across British Columbia (3 facilities/110 acres) and Texas (4 facilities/130 acres) along with partner greenhouses in Ontario (70 acres), British Columbia (25 acres), and Mexico (50 acres). Supported by the Company’s strategically-located logistics and distribution chain, product from these facilities is marketed to local retail grocers and dedicated fresh-food distributors throughout the U.S. and Canada.
Strategic Locations across North America
Cannabis JV with Emerald Therapeutics could be a transformational opportunity
In June 2017, Village Farms International formed a 50/50 joint venture ‘Pure Sunfarms’ with Emerald Health Therapeutics, Inc. (TSXV:EMH) that would create one of the largest cannabis greenhouses in Canada. The JV will involve conversion of 1.1 million sq.ft. of Village Farms’ BC greenhouse assets (Delta 3) to produce 75,000 kg of quality cannabis annually in 2020, with options to convert an additional 3.7 million sq ft (Delta 2 and Delta 1) that would yield a massive 300,000 kg of cannabis annually. With a cultivation license recently (March 5, 2018), the JV will immediately begin cultivating cannabis in the Delta 3 greenhouse. Revenues from the JV are expected once it receives a sales license under ACMPR by July 1, 2018.
Leveraging Village Farms International’s three decades of experience in high-quality, low-cost production, the JV is expected to be one of the lowest-cost producers of cannabis in Canada, at an estimated ~$1.00 per gram compared to the industry average of $2.2 per gram.
Revenues could rise 10x-15x from cannabis: Cannabis production is a significantly more profitable use of the Delta 3 greenhouse operations with potential to generate revenues 10x-15x that of produce, while EBITDA margins could be over 50% compared to mid-single digits for produce. Assuming a conservative $6.00/gram, EBITDA could reach $375 million (Village Farms’ share: $187.5 million) from 75,000 kg alone from Delta 3, while EBITDA could reach $1.5 billion (Village Farms’ share: $750 million) if all three facilities’ output of 300,000 kg are achieved. For 2018, assuming production of ~14,000 kg (assuming 2/3rd of annual production for 2018 as production commences in March 2018) and sales at $6.00 per kg could generate revenues of $84 million (Village Farms’ share: $42 million). For 2019, assuming production of 37,500 kgs would result in revenues of $225 million (Village Farms’ share: $112 million).
Outlook and valuation
With Village Farms’ JV expected to be among the top five cannabis producers, the valuation of Village Farms International in terms of market cap/gram looks enticing at only $9.0 versus ~$29.0 for the top 10 licenced producers.
Disclosure: Neither the author nor his family own shares in the company mentioned above.
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