This company aims to capture a share of the Canadian cannabis market by allocating part of its greenhouse operations to marijuana cultivation and drawing on the expertise of a dedicated marijuana joint-venture producer. Cannabis should be a higher profit-margin product than its existing vegetable operations.
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VILLAGE FARMS INTERNATIONAL, $17.31, symbol VFF on Toronto (Shares outstanding: 47.6 million; Market cap: $824.0 million; TSI Cannabis Quality Rating (CQR): ; www.villagefarms.com), is one of the largest and longest-operating greenhouse growers in North America. The company’s head office is in Delta, B.C.
From its more than nine million square feet of greenhouses in B.C. and Texas, Village Farms produces several varieties of tomatoes as well as cucumbers and peppers. It then distributes them to national grocers in the U.S. and Canada. Along with partners, it also has greenhouses in B.C., Ontario and Mexico.
The company grows its products hydroponically (without the use of soil) in a glass-enclosed, high-technology environment. That helps to control irrigation, fertilizers, carbon dioxide, light, temperature, ventilation, humidity and other climatic factors. Village Farms also provides marketing and technical support, and distribution services for over 200 acres of greenhouse production throughout the U.S., Canada, and Mexico.
The company now aims to use its hydroponics expertise and its 30 years of experience to gain a share of the rapidly emerging global cannabis market. In June 2017, Village Farms and Emerald Health Therapeutics (symbol EMH on TSX Venture) formed the 50/50 partnership Pure Sunfarms.
That joint-venture business will grow cannabis at one of Village Farms’ greenhouses in B.C. The company has allocated a 1.1-million-square-foot, 25-acre greenhouse facility as its contribution to the partnership. Emerald has contributed $20.0 million Cdn. to fund the conversion of the grow facility. By 2020, the venture expects to produce more than 75,000 kilograms of cannabis per year.
Emerald Health Therapeutics, based in Victoria, B.C., produces and sells dried cannabis and cannabis oil for the medical marijuana market. The partners have secured supply agreements for the recreational market in the provinces of B.C., Ontario, and Newfoundland and Labrador.
On March 1, 2019, Village Farms entered into a joint venture with Nature Crisp with the objective of outdoor cultivation of CBD hemp and CBD extraction in multiple states throughout the U.S. VF Hemp is 65% owned by Village Farms and 35% owned by Nature Crisp.
Hemp is a plant in the cannabis family with very low THC content. THC, or delta-9 tetrahydrocannabinol, is responsible for providing marijuana users with a pot-associated high. CBDs, on the other hand, are other cannabis compounds, known as cannabinoids. Researchers have been looking at the possible therapeutic uses of CBD. Processed into an oil, CBD comes in varying concentrations.
Unlike THC, which breaks down when heat is applied and it’s introduced into the body, CBD is not psychoactive. This means it does not change a person’s state of mind when they use it. However, CBD does appear to produce significant changes in the body, and some research suggests that it has medical benefits.
The prospects for CBD products are enhanced now that growing hemp is legal in the U.S. following passage of the U.S. 2018 Farm Bill in January 2019. That legislation designates hemp as an agricultural product, making it a potential source of legal CBD.
Village Farms’ revenue increased slowly but steadily between 2013 and 2017, rising 15.1%, from $137.6 million in 2013 to $158.4 million in 2017. (All figures except share price and market cap in U.S. dollars.) In 2018, its revenue fell 5.3%, to $150.0 million. The decline was due to the loss of tomato production from a facility that it’s converting to cannabis production
Earnings during that time have been erratic. With a profit of $10.5 million ($0.27 per share) in 2013, Village Farms then lost $100,000 (nil per share) in 2014, before earning $2.1 million ($0.05 per share) in 2015. A loss of $2.0 million ($0.05 per share) followed in 2016, with the company bouncing back in 2017 to earn $3.8 million ($0.10 per share). In 2018, the company lost $5.1 million, or $0.11 a share. Narrow profit margins on produce means that the company’s profits are sensitive to selling prices, exchange rate fluctuations and production shortfalls.
For the three months ended December 31, 2018, overall revenue rose 5.2%, to $38.8 million from $36.9 million a year earlier. Village Farms reported a profit in the latest quarter of $270,000, or $0.01 a share, compared to a loss of $607,000, or $0.02 a share.
As at December 31, 2018, Village Farms had cash of $11.9 million and long-term debt of $32.4 million.
Although the Pure Sunfarms project could hurt Village Farms’ profitability in the short-term, that venture is an opportunity for Village Farms to grow a product with higher margins and significant revenue potential. Considering its production expertise, Village Farms should be able to establish itself as a low-cost producer of cannabis. If successful, the company can easily convert more of its facilities.
Meanwhile, Village Farm’s vegetable greenhouses provide it with steady revenue. The company lost $0.11 per share in 2018, but could rebound to make as much as $0.29 a share in 2019.
Village Farms International has a 3-Leaf Cannabis Quality Rating (CQR). The stock is a speculative buy for aggressive investors who want exposure to the marijuana industry.
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