Is Village Farms Positioned For Business Growth Despite Revenue Drop? Analyst Opines Post Q4 Earnings

Village Farms International, Inc. VFF recently reported its fourth-quarter financial results revealing a sequential and year-over-year revenue drop of 22% and 96%, respectively.

Cantor Fitzgerald’s analyst Pablo Zuanic said that revenue decrease could be attributed to a ramp-up in sales and marketing spending and lower bulk sales.

Nevertheless, Village Farms continued to make progress on the branded recreational cannabis front, considering its recent debut in Quebec.

The Analyst

Zuanic maintained an “Overweight” rating but lowered its 12-month price target to $9.30 from $12.50 due to the Canadian sectoral derating.

The Thesis

Village Farms “should benefit in 2022 from growth in the international business and a recent US CBD deal,” the analyst said.

In November, the company acquired a 70% stake in privately-held, Québec-based ROSE LifeScience, a vertically integrated branded cannabis producer, supplier and commercialization expert for CA$19.9 million ($15.6 million) in cash and a total of 2,411,280 common shares of Village Farms valued at CA$26.8 million.

The acquisition expanded the presence of Village Farms in Québec as a cannabis supplier, producer, and commercialization expert, representing roughly 15% of total Canadian retail cannabis sales at the current annualized run rate of more than CA$627 million, the vast majority of which is dried flower and pre-rolled products. Village Farms is based in Vancouver, British Columbia.

Moreover, the company’s US CBD unit, CBDistillery, which generated roughly $30 million in 2021 sales, is expected to report full-year results in 2022. Balanced Health Botanicals was acquired in August for $75 million.

Village Farms gained access to the US retail CBD market through the deal. During the fourth quarter, the business generated $7.5 million in sales, with sales down 2% sequentially pro forma, according to the analyst’s estimates.

"The performance of our Canadian cannabis operations throughout 2021 contributed to a year that saw Village Farms overall deliver growth in revenue and adjusted EBITDA of 58% and 89%, respectively, supported by the profitable contribution of Balanced Health Botanicals since its acquisition in August, and the improvement in market pricing for Village Farms Fresh in the second half of the year," Michael DeGiglio, the company’s CEO stated.

(DeGiglio will be a speaker among many other top names in the cannabis industry during the Benzinga Cannabis Capital Conference in Miami in April. There’s still time to sign up. Click here for more info.)

Over the quarter, the company continued to ramp up innovation in Canadian THC cannabis, with 23 additional SKUs launched during the period.

“With over 110 tons of THC capacity expected by mid-2022 (Delta3 and half of Delta2), and supposedly superior “farming skills,” we think VFF is among the few Canadian operators with the potential for further market-share gains on a sustainable basis,” Zuanic said.

In the meantime, Pure Sunfarms remains the number one flower brand in Ontario, Alberta and British Columbia. In Quebec, the products are available via the ROSE LifeScience platform.

The company’s management expects further top-line business growth and cannabis gross margin to range between 30% and 40% for 2022 due to recent innovation (higher potency single strains) and price adjustments in more matured varieties.

“We calculate that the cannabis unit is valued at only 1.7x our CY22 cannabis sales estimate (and at 1.3x CY23E), with the potential for cannabis EBITDA margins north of 20%,” Zuanic said. “Based on a domestic scale and sustainable momentum, and given the top-five peer valuations, we think a higher multiple is warranted.”

Photo: Courtesy of Yiorgos Ntrahas on Unsplash