Switching From Tomatoes To Cost-Efficient Cannabis Boosts Company's Stock By 35%

Zuanic & Associates has initiated coverage on Village Farms International VFF, assigning an "Overweight" rating. What are the key factors that contribute to the bullish stance on Village Farms International?

Market Positioning and Financial Stability

Senior analyst Pablo Zuanic notes Village Farms as a standout in the Canadian Licensed Producers (LPs) market, valued notably at 0.6 times sales.

The company's strong market share and brand presence are bolstered by its profitable operations and positive cash flow.

Strategic Growth and International Expansion

Zuanic highlights Village Farms' methodical and conservative growth strategy, contrasting it with the rapid and often unsustainable expansion of other players in the field.

The company's approach has been characterized by gradual steps, such as transitioning from B2B (white label) to branded market entry with a limited but focused product range.

Internationally, Village Farms is making significant strides by expanding into markets such as Australia, Israel, and Germany, while also owning a majority stake in Leli Holland, a key licensee in the Dutch legal recreational market, indicating potential for substantial growth in Europe.

Competitive Cost Advantage

A key factor in Village Farms' success is its cost advantage in cannabis production, achieving approximately 35% gross margins. This efficiency is attributed to the company's three decades of experience in controlled environment agriculture, initially with produce like tomatoes, now adeptly applied to cannabis.

“Village Farms International (Village Farms), a large-scale low-cost producer based in British Columbia (the company has shifted tomato greenhouses into cannabis) is the [third] largest producer; flower accounts for 80% of company sales,” reads the report.

Cannabis As Tomatoes

The report also sheds light on the potential of Village Farms' Texas greenhouses, which could play a pivotal role if cannabis legislation in the U.S. becomes more favorable.

This "Texan optionality" presents a substantial opportunity, potentially allowing the company to capture a significant share of the U.S. cannabis market.

"Village Farms' Texas greenhouses, capturing just 1% of the U.S. market under legalized interstate trade, could reach a valuation of $1.05 billion by 2027, with sales potentially soaring from US$40 billion to US$70 billion upon federal legalization," Zuanic wrote.

“Factoring in a 20% probability and discounting to present value at a 10% rate, this option might be worth approximately US$160 million, surpassing the company's current enterprise value.”

Canadian Market Dynamics and Village Farms' Positioning

In Canada, Village Farms has managed to maintain its top three position in the recreational market, achieving this mostly organically, a stark contrast to competitors who often rely on acquisitions.

"During the September-November period, Hifyre reports that Village Farms held a 6.6% share in the total recreational market, ranking second in the flower segment with 12.4% nationally, behind Tilray's 14.9%, and notably outperforming in Quebec with an 11% share," according to the analysis.

"In 2Q23, Tilray (inc. HEXO) TLRY had a 14.0% flower share, Village Farms VFF 13.1%, Organigram OGI 8.6%, BZAM (inc. TGOD) 5.8%, Cronos CRON 5.5%, and Auxly XLY 5.0%, Canopy Growth CGC 4.5%, with others including Sundial SNDL at 3.9%, Cannara Biotech LOVE 2.8%, Weed Me 2.7%, and Aurora ACB 2.3%."

Valuation and Future Prospects

Zuanic's analysis suggests that Village Farms' cannabis unit is undervalued, especially when compared to its peers. While Zuanic & Associates does not set specific price targets as a policy, they express confidence in Village Farms' future growth and upside potential.

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