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This Cannabis Stock Looks Like a Big Winner

Only a few short months ago, Citron Research claimed Village Farms International (VFF) was a fraud. Now, the stock is one of the best performing and most profitable in the cannabis sector following strong Q2 results. The quarterly results could have huge ramifications for the Canadian cannabis sector.

Greenhouse Conversions

Instead of building large new facilities, Village Farms partnered with Emerald Health Therapeutics (EMHTF) to convert existing greenhouses growing vegetables into cannabis. The quick and low-cost conversion positions the Pure Sunfarms JV to become a low-cost producer in the sector.

The partnership was only formed at the end of 2018 and Pure Sunfarms has already converted a 1.1 million square foot greenhouse in Delta, BC into full production of 75,000 kg of dried cannabis. The JV is in the process of converting another 1.1 million square foot facility in the same location to produce another 75,000 kg of cannabis by the end of 2020.

Pure Sunfarms will produce 150,000 kg of dried cannabis with Village Farms owning 50% of the product or the equivalent of 75,000 kg. In almost no time, the initial facility has already reduced the full cost to produce a gram of cannabis to C$0.65.

These low costs are a problem for the likes of Aurora Cannabis (ACB) and Canopy Growth (CGC). The large producers built shiny new facilities with the plans of reducing production costs to below C$1.00 per gram and this JV has already undercut this goal. Other players such as Zenabis Global (ZBISF) are entering the market with a similar goal of converting greenhouses to grow cannabis.

Stock Overview

Village Farms is an interesting stock considering the Citron Research call. The stock has a market valuation below $700 million while revenues reached $53.5 million in Q2 and cannabis EBITDA topped over $9 million.

The company is difficult to value considering the majority of revenues still come from growing produce. The upside comes from the Pure Sunfarms JV that only produced 8,000 kg in the last quarter.

In the next few quarters, the JV will double the sales of cannabis with the potential of growing the sales price per gram above $3.00. The Q2 cannabis sales of $12 million will quickly double to $24 million and surge above $33 million on a price increase to just $3.50 per gram.

All of these estimates don’t even include the CBD business with JVs in Colorado and three Eastern states plus the conversion of a facility in Texas. The company has a clear path to 2020 cannabis sales of at least $300 million, if not more depending on how CBD sales go. The big question remaining on how far Village Farms moves beyond selling CBD biomass and wholesale oil to premium products.

In the shadow of the 20% gain we’ve seen this month, Roth Capital analyst Scott Fortune has reiterated a Buy rating on Village Farms stock with a $25 price target, noting, "With the next two quarters seasonably strong, we recommend shares at these levels." (To watch Fortune's track record, click here)

Takeaway

The key investor takeaway is that Village Farms continues to produce exceptional operational results. The company is quickly moving beyond the questioned JV with Emerald Health and is now one of the most profitable cannabis producers without the hype.

Investors might be cautioned to wait for the next negative call from Citron Research before buying Village Farms after the recent rally.

See VFF's price targets and analyst ratings on TipRanks