VFF - Village Farms Q1 2023 Report Shows Improvement In Canadian Cannabis Sales

2023-05-23 08:22:31 ET

Summary

• Village Farms reported a 40% increase in its Canadian cannabis sales for Q1-2023.
• The company is further increasing its revenues through cannabis imports to Germany, Israel, and Australia.
• The company is still operating at a net loss of $6.6 million, which is due to low revenue in its produce segment and to high excise tax in its Canadian.
• Village Farms' stock price continues a long downtrend, losing over 76% percent YTD.
• I rate Village Farms as a hold and recommend that you watch the company’s future performance.

Village Farms ( VFF ) boasts in its recent Q1-2023 report that it holds the number two market share of Canadian retail cannabis sales. The company is impressive in its performance and market positioning compared to other Canadian LPs. Village Farms is experiencing increased sales in Canadian markets and is exporting cannabis internationally.

The company is uniquely positioned to profit from US legalization, as well as emerging global cannabis markets. The company’s tomato and vegetable operations in North America are a key part of its US cannabis entry strategy. For now, volatility in the US produce market is weighing down Village Farms’ overall financial performance. The company is also citing high cannabis excise tax as a cause of ill-performance, in addition to other issues with the Canadian cannabis market.

Village Farms’ stock price has suffered the same market beating and downtrend as the rest of the publicly traded cannabis companies. There is no end in sight for this volatile environment, and it is unclear how the possible passage of the Safe Banking Act will change these conditions. For now, I rate Village Farms as a hold and recommend that investors watch the company’s performance.

Q1-2023 Performance

For Q1-2023, Village Farms saw its total sales decrease 8% YoY, falling from $70.2 million to $64.7 million. It reported a net loss of $6.6 million for the quarter. Its overall EBITDA of $0.5 million has improved, compared to a negative $6.1 million YoY. Certain segments are performing better than others. The company performed the best in the Canadian cannabis markets, which may be showing signs of recovery .

The company’s overall cannabis segment saw a 4% increase YoY. The company reported $30 million in net sales from cannabis. Net loss for its cannabis segment was $0.5 million, which shows an improvement YoY (loss of $1.3 million). EBITDA for Village Farms' cannabis segment was $3.8 million. This segment includes sales from US cannabis and Canadian cannabis, as well as international cannabis exports.

Canadian cannabis sales from Pure Sunfarms and Rose LifeScience improved significantly. Village Farm’s Canadian Cannabis retail branded sales increased 40%. The company reported a gross margin of 33% on its cannabis sales. Net loss was still $0.1 million, but the company reported an EBITDA for its Canadian cannabis segment of $3.9 million, representing a 95% increase YoY.

Village Farms is exporting cannabis internationally, and it has helped the company’s revenues. The company is currently exporting cannabis to Germany, Israel, and Australia. It reported $1.7 million in international sales for Q1-2023, representing a 1050% increase YoY. The company is positioned to increase its exports and to enter new legal markets.

Village Farm’s CEO cites Canada’s extreme excise tax on cannabis as a serious problem for making a profit in Canadian cannabis sales. The company reported $13.8 million in excise tax for the quarter. The Canadian government brings in billions of dollars from excise tax from cannabis sales. The over taxation of cannabis is causing harm to the profitability of its cannabis markets.

Village Farms reported US cannabis sales of $5.0 million, with a gross margin of 65%. The company sells CBD products in the US through its subsidiary Balanced Health Botanicals. The company’s US cannabis operations are running at a net loss of $.4 million and an EBITDA of negative $0.1 million.

Village Farms’ produce sales were down, although there is some improvement. The company reported produce sales of $34.6 million versus $41.3 million YoY. The company showed a net loss on produce of $2.6 million, representing a more than 50% improvement YoY (negative $5.6 million). EBITDA for produce was a negative $1.0 million, compared to a negative $6.2 million YoY. Village Farms is seeing quarterly sequential improvement in its produce segment.

Out of Village Farms' three operating segments (produce, Canadian cannabis, US cannabis), the company’s produce segment performed the worst. It brought in the largest amount of revenue, but suffered from a high cost of sales. Village Farm’s Canadian cannabis segment reported an EPS of .01 versus a loss of .06 per share overall.

The market consensus for Village Farms’ Q2-2023 revenue is $72.5 million. Below is a chart of the company’s revenue and profit performance for the last eight quarters.

Source: SeekingAlpha

Village Farms’ financial performance has been consistent for the last two years. The company’s performance is suffering under produce price compressions in the US produce market, for instance the falling market prices of tomatoes, and because of Canadian cannabis market conditions, including high excise taxes and falling retail prices. It is hoped that the company will show a positive net income in future reports.

Synergies for Future Growth

The most important synergy for Village Farms’ revenue growth is its exporting of cannabis to emerging international cannabis markets. The company is currently exporting cannabis to Germany , Israel , and Australia . Village Farms is positioned to export cannabis to the Netherlands via its 85% ownership of Leli Holland, which holds a cherished Dutch cannabis production license.

Village Farms recently announced that its cannabis, grown by Pure SunFarms, is now available on the German medical markets. IUVO Therapeutics, a German pharmaceutical company, distributes the company’s Pink Kush dried flower. Village Farms and IUVO have formed a partnership and plan to continue to import Pure SunFarms’ cannabis flower. The German medical cannabis market is still in its early phases of growth. Village Farms has established itself early in the European cannabis scene.

Village Farms, though Pure SunFarms, also exports cannabis flower to medical markets in Israel and Australia. The Israeli cannabis markets are slowly growing, while Australia is seeing more rapid increase in medical patients. The company operates in Australia through its 12% ownership of Altum.

As to US cannabis markets, Village Farms will transition its tomato growing operations in west Texas into cannabis grows. The company awaits federal cannabis legalization before it may enter US markets. Village Farm states in its recent Q1-2023 report, that it has filed for a Texas medical cannabis cultivation license. If granted, the company will have to find a legal solution for its operations, for instance it may spin off a US company to run its Texas assets.

Since US cannabis legalization is uncertain and the Canadian cannabis markets remain volatile, it is in the company’s interests to establish export channels into emerging global cannabis markets. Village Farms will be well positioned for European and south Asian cannabis markets before the other companies arrive. Only a few publicly traded cannabis companies are positioned for global exports.

Stock Price Performance and Valuations

Source: www.StockCharts.com

Village Farms’ stock price has been on an extended downtrend, decreasing 76% over the last twelve months and 45% year-to-date. All cannabis stocks are undergoing long volatility cycles with little relief. Village Farms’ stock price trades under $1 per share and may have to undergo a reverse split before it forms a new uptrend. It is unlikely to retake the $1 price channel any time soon.

The company’s stock price is undervalued. Its book value is $2.92 per share. The company’s EV / Revenues (FTM) ratio is .45. Most cannabis stocks are undervalued at this point, and the trend does not make a buy-it-cheap strategy tenable. It is unclear what event or when cannabis stocks will receive a renewed market interest. Until then, companies like Village Farms, which operate at a net loss, will remain under scrutiny. The company feels that it is moving towards profitability. The larger market uncertainty leads me to rate the Village Farms’ stock as a hold for now.

Conclusion

Village Farms has shown great improvement in the Canadian cannabis markets. The company enjoys a large share of the retail sales of its cannabis products. Village Farms reports net income from its Canadian cannabis operations, which shows that it is performing better than the rest of the Canadian LPs. The company is exporting cannabis to emerging medical markets, which has given its revenue numbers a boost. Village Farms is well-positioned to grow into several international markets and the US market. The company’s performance is impressive, but cannabis companies are undergoing long term volatile market conditions. Until these conditions change, I rate the company’s stock as a hold.

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