Based in British Columbia and Texas, this company is one of North America’s largest growers of greenhouse vegetables.
Now it will use its expertise in hydroponic growing in partnership with a leading producer of medical cannabis. They aim to produce more than 75,000 kilograms annually by 2020. The costs of setting up the venture will hurt profits in the short term, although the company will continue to receive steady revenue from its vegetables. And in the long run it could benefit from a product with higher margins and strong revenue potential.
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VILLAGE FARMS INTERNATIONAL, $6.19, symbol VFF on Toronto (Shares outstanding: 47.6 million; Market cap: $294.6 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.
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.
Village Farms’ revenue has increased slowly but steadily over the past five years, 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.)
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). 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 June 30, 2018, overall revenue fell 7.7%, to $42.0 million from $45.5 million a year earlier. The decrease was mainly due to the transfer of some of growing capacity to the Pure Sunfarms cannabis project.
Village Farms reported a loss in the quarter of $2.3 million, or $0.05 a share, compared to earnings of $4.3 million, or $0.11 a share a year earlier. This loss reflects the fall in revenue as well as the costs involved in starting up Pure Sunfarms.
As at June 30, 2018, Village Farms had cash of $12.9 million and long-term debt of $34.2 million. In October 2018, it raised $22 million Cdn. in a share issue. The company plans to use some of those funds for further investment in Pure Sunfarms.
Although the Pure Sunfarms project will continue to 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 is expected to lose $0.11 per share in 2018, but could rebound to make as much as $0.28 a share in 2018.
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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