VFF - Village Farms: Tough Quarter

2023-03-09 14:56:00 ET

Summary

• Village Farms International, Inc. reported a mixed Q4 2022, with revenues falling YoY.
• Village Farms reported solid growth in the Canadian cannabis sector offset by weakness in other categories.
• The recent equity raise diluted existing shareholders, but new Village Farms International shareholders can buy the stock with nearly 50% of the market cap in cash.
• VFF stock trades at less than 1x cannabis sales and a potential low multiple of adjusted EBITDA.

The Canadian cannabis space remains a difficult place to invest. Village Farms International, Inc. ( VFF ) correctly entered the space slowly, yet the company finds VFF stock now trading below $1 due to a tough cannabis market. My investment thesis remains Bullish on the stock, but Village Farms recently cut some of the upside with a dilutive equity raise at the lows.

Big Assets

Village Farms was always appealing from the start due to their big greenhouse assets in Canada and Texas and a history of farming produce. Along with a conservative management team, the Canadian LP was poised to not over invest while entering a competitive cannabis market.

Via the Pure Sunfarms joint venture, Village Farms slowly converted greenhouses in the Vancouver area to grow cannabis producing solid growth for the company. Cannabis revenues have constantly grown heading into the Q4'22 results , while profits have been very volatile.

The Q4 results were equally mixed, with revenues missing targets and Village Farms writing off $11.0 million worth of Canadian cannabis inventories. Mostly due to currency impacts and the produce business, the company only reported quarterly revenues of $69.5 million, down 4.5% from last year. Revenues only declined 1% on a constant currency basis.

The Canadian cannabis business was C$38.2 ($27.9) million in Q4 for a solid 12% gain from the prior year. Village Farms even saw branded retail sales jump 25%, but the company was hit by a 30% dip in wholesale cannabis sales as other producers cut back on inventories in the system.

Village Farms reported adjusted EBITDA dipped to $4.7 million. As the above chart highlights, the Canadian cannabis business has struggled to growth profits despite constant sales growth and shift to more retail branded sales.

The big weakness in the cannabis business was the U.S. cannabis division where CBD sales were brutal. The company saw Q$ sales dip to only $5.3 million, down a sharp $2.2 million YoY.

While the produce business isn't overly meaningful to the valuation, it does contribute to over 50% of sales. Total produce sales focused on tomatoes and other such produce at the facilities in Texas (future cannabis greenhouses on approval) were down $2.2 million to $36.2 million in the quarter.

Big Dilutive Hit

Despite regularly trading above $2 heading into year end, Village Farms just raised $25 million in gross proceeds from selling 18.35 million shares to certain institutional investors. The company sold the shares at only $1.35 per share and issued another 18.35 million warrants at an exercise price of $1.65.

The warrants would raise an additional $30 million in gross proceeds via the exercise of the warrants, for a total of $55 million worth of cash. The unfortunately part of the deal is that Village Farms will sell up to 36.7 million worth of shares in the process, though the warrants are now far under water.

The Canadian cannabis company had only 88.7 million shares outstanding prior to this offering in late January. Village Farms ended the year with a cash balance of $21.7 million, with $5.0 million restricted. The company now has a cash balance of $46.7 million prior to any cash impact during Q1.

The stock now has a market cap of only ~$100 million with 107.1 million shares outstanding, while total cannabis sales alone are in the $33+ million range on a quarterly basis, or over $132 million annually. The company just started shipping cannabis to Israel in a potential further boost to cannabis sales.

Investors can now buy Village Farms far below the recent offering price at below $1, but the cannabis sector has shown no signs of turning around. The competitive market continues to get more competitive each day.

VFF stock is cheap and is extremely cheap on any ability to actually reach adjusted EBITDA targets. If the company can approach $20 million in adjusted EBITDA in 2024, the stock only trades at ~5x EBITDA targets.

Takeaway

The key investor takeaway is that Village Farms International, Inc. is positioned solidly in the cannabis market, but the sector remains under extreme pressure. Village Farms International, Inc. raised capital at a difficult time, boosting the balance sheet to nearly half of the current market cap, though shareholders were diluted ~20% in the process.

Investors can now buy Village Farms International, Inc. stock far below the recent capital raise.

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