VFF - Village Farms Is Still Cheap

2023-08-14 08:40:01 ET

Summary

• Village Farms stock has soared 51.7% but is still down 36.6% in 2023, making it an attractive investment opportunity.
• Q2 results showed higher sales and better-than-expected adjusted EBITDA, with the cannabis business in Canada performing well.
• I continue to hold a large position in my model portfolio despite the big bounce.

Village Farms ( VFF ) soared 51.7% last week, but I still like it. This is not my usual call to stick with stocks that rally so sharply, but the stock is still down 36.6% in 2023. This is down almost twice as much as cannabis stocks as measured by the New Cannabis Ventures Global Cannabis Stock Index, which has declined 20.2%.

I first wrote about Village Farms near the end of January, calling it a deep value after the stock had plunged following an equity offering. As cheap as I thought it was then at $0.98, it is lower now ($0.85). I followed up in late May in a piece on three Canadian LPs that I like , including Village Farms, which was then $0.71. While I did reduce it on the bounce from the low close of $0.56, it is still 9% of my Beat the Global Cannabis Stock Index model portfolio at my investment group. I really loaded up near the low!

In this piece, I provide an update on Q2 and the outlook, assess the valuation and take a look at the chart.

Q2 Results

Analysts were expecting the company to generate overall revenue of $71 million with adjusted EBITDA of -$1 million. The company reported substantially higher sales results, with overall revenue of $77.2 million falling 7% and adjusted EBITDA of a much better-than-expected $4.5 million. The company operates 4 segments: VF Fresh (produce), Cannabis Canada (Pure Sunfarms and Rose LifeScience), Cannabis U.S. (Balanced Farms CBD) and Clean Energy (with very small revenue).

Looking at the 4 segments, VF Fresh generated revenue of $43.8 million, down 7% from a year earlier, with adjusted EBITDA of $1.3 million. The loss a year ago of -$10.3 million was about 100% of the total adjusted EBITDA loss then.

The CBD business generated revenue of $5.3 million with adjusted EBITDA of $354K. This has been much worse than the company had projected when it announced the deal two years ago.

The cannabis business in Canada made up 36% of total sales. Revenue of $28.1 million fell by 6% from a year ago as adjusted EBITDA of $4.8 million soared from $2.7 million a year earlier. Branded product sales increased substantially, while non-branded sales fell.

The Outlook

Going into the report, analysts, according to Sentieo, expected the company to generate revenue of $294 million in 2023 with adjusted EBITDA of about zero. Now, they project revenue will fall 5% to $278 million with adjusted EBITDA of $4 million.

For 2024, analysts were projecting revenue of $288 million with adjusted EBITDA of $3 million. Now, they expect revenue will increase 6% to $295 million with adjusted EBITDA of $7 million.

Valuation

For assessing the value, I suggest that investors compare the company to its tangible book value, which is $222 million. The current market cap is just $94 million, a ratio of 0.42X. Too much debt or negative cash flow would impact negatively the interest in the stock at a discount, but I think this discount is too high. I have shared with subscribers a year-end target of $1.00 (50% of tangible book value), but it could be a lot higher than that level.

As I look out a full year, I sense that it could get to tangible book value ($2), but I want to assess the valuation with more of an earnings basis. For 2025, there are just two analysts providing estimates rather than the six for 2023 and 2024. These analysts currently project overall revenue will grow 18% to $348 million with adjusted EBITDA soaring to $28 million. Taking a more conservative outlook of just $15 million of adjusted EBITDA, one gets a blended adjusted EBITDA of $12.3 million for the year ending 8/31/25. I think a ratio of 15X enterprise value to adjusted EBITDA is justified, and that would yield an enterprise value of $185 million. This works out to an equity value of $160.5 million after subtracting the net debt, which suggests a stock price of $1.45. This would give a gain of 70% from the current price and would still be below the warrant conversion price of $1.65.

I believe that the company should consider exiting the produce business, and I am not excited by its CBD effort. Still, both of these units have value above zero, but looking at just the Canadian LP leaves me feeling comfortable with the current valuation being very low. In the first half of 2023, that unit generated $53.2 million of revenue with adjusted EBITDA of $8.7 million. Great performance in a tough market!

The Chart

The stock plunged after the equity offering in late January, but began to rally. It failed to fill the gap, and sold off over time to a new 10-year low. The stock left a gap on Wednesday morning after reporting its Q2, and the volume has been pretty high:

Investors should remember that there are now a lot of $1.65 warrants from that January financing. The company sold 18.35 million shares at $1.35 in an offering that included the same number of warrants.

Taking a look at the past few years, one can see how much the stock has declined:

In my view, the charts suggest initial resistance near $1 and then larger resistance in the gap from that equity offering. If it can get there, I see much larger resistance near $2, which was the bottom of trading in Q4 and is near tangible book value.

Conclusion

Village Farms is not my favorite Canadian LP, but it remains very inexpensive despite the big bounce last week after the Q2 financial report. Despite its removal from the index at the end of June due to low trading volume and the massive rally last week, I still include it in my model portfolio at my investment group.

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