U.S. Markets closed

Village Farms (VFF) Has a Lot Going for It

support@smarteranalyst.com (Ben Mahaney)

Village Farms International (VFF) has rapidly changed the narrative and outlook for the company after one financial outlet called for it to plummet to $1 per share.

While it has faced some significant headwinds over the last year or so, the company has emerged from them with a solid growth plan in place, with the bulk of it being in relationship to cannabis and CBD.

The company is rapidly retrofitting existing greenhouses to meet the fast-growing demand for pot and CBD, and is poised to continuing growing at a rapid pace.

Why its strategy to grow quickly is the right one

What Village Farms has going for it on the production side of the business is its existing large square footage in its greenhouses from growing vegetables. In West Texas alone it has 5.7 million square feet in greenhouse facilities it is retrofitting to grow marijuana in.

At this stage of the game, I believe that's the correct strategy to use, otherwise the cannabis market would rapidly outpace the company because of it entering the market later than many of its competitors.

I also like the fact it's not satisfied in growing its production capacity modestly, but is committed to growing it significantly. I think the smaller producers are going to struggle to survive once the initial stage of low-margin recreational pot has matured. They'll either go out of business, get acquired by larger competitors looking for more supply, or stagnate in growth, managing, at best, to retain their current sales.

Even with its growth potential, on the cannabis side of the business it will take until 2021 before it's able to achieve an estimated 150,000 kilograms in production. Its larger competitors are already at or beyond that production level, or will reach it by the end of 2019. As of today, the company will be able to produce about 75,000 kilograms annually through 2021, before it completes its Delta 2 greenhouse.

While the capacity at these greenhouses, based upon approximately a combined 2.1 million square feet, won't match the efficiency of many of its competitors, I don't see that as being a problem if it manages to keep its costs low, which appears it will be able to.

Its challenge and the uncertainty on the cannabis side of the business is what the market will be like once it finally reaches 150,000 kilograms in production. How much of the market will be fully supplied is the issue there. I'm thinking mostly in terms of the recreational pot market here.

In the first quarter Village Farms saw Pure Sunfarms - which it has 50 percent ownership in - generate revenue of $10.8 million, up almost $8 million from the $2.8 million in the prior quarter of production. Net income came in at $4.3 million, while adjusted income was $3.2 million.

Ready to become a U.S. hemp giant

Where the biggest potential lies concerning Village Farms is in the U.S. hemp business, which is a big part of the fast-growing CBD market. It think this will vastly outperform its cannabis business over the long term, based upon growth projections from Brightfield Group, which projects CBD sales to grow to $22 billion globally by 2022.

Village Farms is uniquely positioned to take advantage of this because of its exposure to Texas, which recently passed a law that will allow the company to retrofit its massive 5.7 million square feet of greenhouse space in the state for the purpose of growing hemp.

Because hemp is much easier and less expensive to grow than cannabis, it should be able to rapidly scale its U.S. operations. It has already planted 800 acres of hemp in three states, and should start to harvest sometime in the summer. This a part of one of its two hemp joint ventures it is part of.

Along with that, it also has another joint venture where it will begin production on 120 acres in Colorado in 2019, and will expand that to 500 acres in 2020. That will bring outdoor production to 1,300 acres as it stands today.

As for its greenhouses, it has already started to convert about half of its 1.3 million square foot greenhouse located in the Permian Basin for the purpose of cultivating and extracting CBD from hemp.

With a licensing process having been implemented to cultivate and process hemp, the company will have to wait to apply for them until the State sets up a date to do so. That means it'll be a little longer before the effects of the positive catalyst will have an impact on the performance of Village Farms; at least as it relates to its existing greenhouses.

Conclusion

In 2017 Village Farms generated $158 million in sales, primarily from its vegetable business. That business will remain in place for now, but it isn't clear if it will decline in sales as the company utilizes an increasing amount of its existing greenhouse square footage for hemp production.

As the company is today, it will continue to enjoy consistent sales from vegetables as it transitions a significant amount of its business to growing hemp and cannabis.

The good news is it has a steady stream of revenue from its predictable vegetable sales, is increasing cannabis revenue, and is aggressively going after the CBD market, starting with outdoor production as it waits for licensing approval for its indoor operations in Texas.

I've seen one analyst that projected 2021 sales to climb to about double what the company generated in 2017, but I think, based upon its indoor and outdoor production pace, that number is probably going to be a lot higher than the estimated $320 million projected.

For these reasons, I think Village Farms as a lot more room to increase its value and share price over the next couple of years. The only uncertainty in my view is how it does with cannabis sales from its Canadian operations. But even if that is modest at best, CBD should be the major revenue driver once it launches its indoor hemp production in Texas.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

Read more on VFF: This Cannabis Stock Is Running Full Speed Ahead

 

More recent articles from Smarter Analyst: