Initiating Coverage Village Farms International, Inc. VFF-T BUY - - PowerPoint PPT Presentation
January 18, 2018 Initiating Coverage Village Farms International, Inc. VFF-T BUY Price Target C$11.00 Current Stock Price: C$7.67 Potential Return: 43% 43% It Takes A Village To Raise A Crop Vahan an Ajami mian an Analyst -
January 18, 2018
VFF-T BUY – Price Target C$11.00
Current Stock Price: C$7.67 Potential Return: 43% 43%
Beacon Securities Limited
Vahan an Ajami mian an
Analyst - 416.643.3879 vajamian@beaconsecurities.ca
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Management knows how to grow high quality production at scale and low cost. The industry is seeing many players announce large scale greenhouse expansions and applying substantial valuations to their shares. Some of these players have not yet sold a gram of production grown in a greenhouse. Accordingly, we suspect some will be hit with challenges in scaling production while also switching building types from indoor to greenhouse. While it will take Village Farms some time to adjust to the specifics of growing cannabis as well, we believe that its team, which has been growing a variety of crops together in the same facility for
partner, Emerald Health Therapeutics Inc. (EMH-V, not covered), which was originally licensed by Health Canada almost four years ago. Management’s under-promising leaves room to over-deliver. Management is projecting yields of 75,000 kg in a 1.1MM sq. ft. greenhouse (Delta 3 – D3). This rate is meaningfully lower than most of the company’s peers are projecting. While we see compelling value in Village Farms’ shares even at a run rate of 65,000 kg for Pure Sunfarms, there is clearly the potential for the company to significantly surpass these figures. There is an underlying business that ‘pays the bills’. Despite the Mexican competition, which has driven the company’s EBITDA margins over the past decade from ~10% to ~5% currently, management has found a way to control costs and still generate positive free cash flow after debt repayments. Furthermore, in what will be critical when selling cannabis to provincial governments, the team already knows how to sell to large demanding customers as it has sold to Walmart, Costco, Loblaws etc. for years (i.e., has experience with on time delivery, logistics, IT integration, dealing with sometimes finnicky customers, etc.). Good shareholder base and a tight cap structure. Village Farms has only 42.0MM shares outstanding, and 44.6MM on a fully diluted basis. Insiders own 26% of the company. We believe institutional investors hold a much larger percentage of its shares than is the case for most of its peers. Incredible optionality. Pure Sunfarms has the option to acquire Delta 2 (D2 – 1.1MM sq. ft.) and/or Delta 1 (D1 – 2.6MM sq. ft., the largest greenhouse in North America). The values at which these greenhouses would be acquired by the JV have already been set at undisclosed amounts, which we believe are higher than the C$20MM paid for D3. Critically, Village Farms can maintain its 50% share in the JV simply by ‘throwing greenhouses’ at it as opposed to being forced to fund it with cash and diluting investors. While the company has no plans to cultivate cannabis in the U.S. until it becomes federally legal, the potential to one day convert its 5.7MM sq. ft. of greenhouses in Texas represents a free call option for investors.
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Established in 1987, Village Farms is one of the largest and longest-running greenhouse growers in North America. It produces and distributes premium quality tomatoes, bell peppers, and cucumbers to national grocers, primarily retail supermarkets and fresh food distribution companies, in the U.S. and Canada. With crop growing practices that are environmentally sustainable and resource-efficient, the company leads the greenhouse vegetable industry in North America in terms of sales, distribution, and marketing. This is achieved through the business’ focus on building and maintaining strong customer relationships, and upholding the highest standards of food safety.
Source: Company reports, Beacon Securities.
The company owns and operates seven large- scale greenhouse facilities in BC and Texas, and has partnered with greenhouses in BC, ON, and Mexico, enabling it to service its customers with fresh produce 365 days a year reliably. Products are grown hydroponically, using coconut fibre and rockwool, in a glass- enclosed structure with proprietary technology that regulates climate conditions and yields consistent, high-quality produce that fetches a premium price. Seeing margins on produce decline over the past few years due to competition from Mexican producers, the company has proactively decided to branch out into cannabis.
(US$, 000's) FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 LTM Revenue $130,524 $144,768 $164,448 $133,942 $137,635 $136,615 $141,934 $155,502 $158,850 Gross Margin $14,765 $21,136 $23,821 $7,977 $18,272 $13,885 $13,756 $14,724 $14,434 EBITDA $8,740 $15,272 $15,759 $1,529 $12,965 $8,778 $10,193 $9,385 $8,272 Gross Margin % 11% 15% 14% 6% 13% 10% 10% 9% 9% EBITDA Margin % 7% 11% 10% 1% 9% 6% 7% 6% 5%
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On June 6, 2017, Village Farms announced that it had entered into a JV with an existing LP, Emerald, to form Pure Sunfarms
in the U.S. until it is federally legal. With Village Farms’ expertise in low-cost greenhouse growing and Emerald’s cannabis compliance/licensing as well as intellectual property, the resulting new corporation is expected to develop and sell high-quality, low-cost cannabis at a large scale. To initiate the JV, Village Farms has contributed a 1.1MM sq. ft. greenhouse facility in BC (the “Delta 3” greenhouse, or D3), determined to have a fair value of C$20MM. Emerald has agreed to match this amount in cash to fund the conversion of the facility, resulting in a 50% interest for each (in the form of common shares). Pure Sunfarms has commenced conversion of one quarter (Q1, ~250,000 sq. ft.) of its Delta 3 facility for the cultivation of cannabis – the license for which is under review by Health Canada. The company expects to complete the conversion of Q1 this quarter and, subject to the receipt of cultivation and sales licenses from Health Canada, begin selling dried cannabis.
Source: Company reports.
The company expects all four quadrants of Delta 3 to start commercial production in Q4/FY19, and be able to reach an annual production rate of 75,000 kg in
would be a more efficient use for cannabis cultivation, potentially generating revenue 10-15x that of current produce, with an EBITDA margin >50%.
5 Beacon Securities Limited With a dedicated focus to greenhouse growing, Village Farms has built deep agricultural experience (a combined 750 years from multiple growing regions around the world), and has become an expert in agricultural safety, holding biological control/pesticide registrations, adopting Good Agricultural Practices (GAP), and undergoing comprehensive food safety audits by Primus Labs. Management sees cannabis no different than any other agricultural product, although it will have its own unique ramp up challenges to master. There has been little turnover at the company. The team has largely been cultivating with established management and labour forces through the course of its 30 years of operating history. This, coupled with the point above, means that the company should be time-efficient in launching its cannabis business. Village Farms has advanced proprietary technological expertise for greenhouse crop-growing, with its Applied Research Division continuously developing improvements for its production technology to stay at the forefront of the industry. Greenhouse systems provide control to achieve the best desired agricultural climate, including the ability to efficiently harness all available natural sunlight, resulting in lower energy needs and therefore lower cost
(tomatoes don’t have the margins to justify the capex, but marijuana does). Besides the greenhouse facilities, Village Farms also has the infrastructure in place to begin selling cannabis to sophisticated institutional wholesale buyers such as LCBO, Shoppers Drug Mart, etc. It has the IT systems, has mastered the logistics of maintaining a regular and stable supply chain, and has the know-how to deal with potentially temperamental clients. It’s worth noting that it costs less to convert a greenhouse (C$55MM for 1.1MM sq. ft. or ~C$50/sq. ft.) than to build one from scratch (rule of thumb is C$~150/sq. ft.). Additionally, the large scale of operations provides Village Farms with cost efficiencies from economies of scale.
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Source: Company reports.
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Source: Company reports.
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Source: Beacon Securities.
9 Beacon Securities Limited
Source: Beacon Securities.
Pure Sunfarms (000's) Dec-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Dec-20 Dec-21 Q4/FY17 FY17 Q1/FY18 Q2/FY18 Q3/FY18 Q4/FY18 FY18 Q1/FY19 Q2/FY19 Q3/FY19 Q4/FY19 FY19 Q1/FY20 Q2/FY20 Q3/FY20 Q4/FY20 FY20 FY21 Revenue Drivers Production Sold (kg) From D3 - Q1 1,219 1,625 2,844 1,625 2,031 3,656 2,438 2,844 3,250 3,656 12,188 16,250 From D3 - Q2 1,625 2,031 2,438 2,844 8,938 3,250 3,656 4,063 4,063 15,031 16,250 From D3 - Q3 1,625 2,031 3,656 2,438 2,844 3,250 3,656 12,188 16,250 From D3 - Q4 813 1,625 2,438 3,250 8,125 16,250 kg and kg equivalents sold 1,219 1,625 2,844 1,625 2,031 5,688 6,906 16,250 8,938 10,969 13,000 14,625 47,531 65,000 Realized Price ($/g) C$0.00 C$0.00 C$0.00 C$0.00 C$5.00 C$4.75 C$4.86 C$4.75 C$4.50 C$4.25 C$4.00 C$4.23 C$4.00 C$4.00 C$4.00 C$4.00 C$4.00 C$4.00 Total Revenue C$0 C$0 C$0 C$0 C$6,094 C$7,719 C$13,813 C$7,719 C$9,141 C$24,172 C$27,625 C$68,656 C$35,750 C$43,875 C$52,000 C$58,500 C$190,125 C$260,000 Variable Costs COGS/g C$0.00 C$0.00 C$0.00 C$0.00 C$2.00 C$1.90 C$1.94 C$1.80 C$1.70 C$1.60 C$1.50 C$1.59 C$1.40 C$1.30 C$1.20 C$1.10 C$1.23 C$1.00 Total COGS C$0 C$0 C$0 C$0 C$2,438 C$3,088 C$5,525 C$2,925 C$3,453 C$9,100 C$10,359 C$25,838 C$12,513 C$14,259 C$15,600 C$16,088 C$58,459 C$65,000 Gross Margin C$0 C$0 C$0 C$0 C$3,656 C$4,631 C$8,288 C$4,794 C$5,688 C$15,072 C$17,266 C$42,819 C$23,238 C$29,616 C$36,400 C$42,413 C$131,666 C$195,000 Overhead Expenses C$750 C$1,300 C$1,000 C$1,250 C$2,500 C$2,750 C$7,500 C$3,000 C$3,250 C$7,735 C$7,735 C$21,720 C$8,580 C$8,775 C$8,840 C$9,360 C$35,555 C$39,000 Pretax Income
C$1,156 C$1,881 C$788 C$1,794 C$2,438 C$7,337 C$9,531 C$21,099 C$14,658 C$20,841 C$27,560 C$33,053 C$96,111 C$156,000 Taxes C$0 C$0 C$0 C$0 C$301 C$489 C$790 C$466 C$634 C$1,908 C$2,478 C$5,486 C$3,811 C$5,419 C$7,166 C$8,594 C$24,989 C$40,560 Net Income (C$)
C$856 C$1,392
C$1,327 C$1,804 C$5,429 C$7,053 C$15,613 C$10,847 C$15,422 C$20,394 C$24,459 C$71,122 C$115,440 US$ To C$ $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 Net Income (US$)
US$685 US$1,114
US$1,062 US$1,443 US$4,343 US$5,642 US$12,490 US$8,677 US$12,338 US$16,316 US$19,567 US$56,897 US$92,352 Village Farms' Share
US$342 US$557
US$531 US$722 US$2,172 US$2,821 US$6,245 US$4,339 US$6,169 US$8,158 US$9,784 US$28,449 US$46,176 Capex C$5,000 C$5,000 C$15,000 C$1,000 C$7,000 C$3,000 C$26,000 C$4,000 C$5,000 C$10,000 C$5,000 C$24,000 C$250 C$250 C$250 C$250 C$1,000 C$1,000 Cash C$13,700 C$13,700 C$25,700 C$23,450 C$17,306 C$15,698 C$15,698 C$13,025 C$9,829 C$5,258 C$7,311 C$7,311 C$17,907 C$33,079 C$53,224 C$77,433 C$77,433 C$191,873 Total Net Assets C$39,782 C$39,782 C$66,782 C$65,532 C$66,388 C$67,780 C$67,780 C$69,107 C$70,911 C$76,340 C$83,393 C$83,393 C$94,239 C$109,661 C$130,056 C$154,515 C$154,515 C$269,955 Total Net Assets - Village Farms' Share C$19,891 C$19,891 C$33,391 C$32,766 C$33,194 C$33,890 C$33,890 C$34,554 C$35,455 C$38,170 C$41,696 C$41,696 C$47,120 C$54,831 C$65,028 C$77,257 C$77,257 C$134,977 Key Operational Data kg sold - Y/Y % Change
325% 471% 450% 440% 129% 112% 193% 37% Revenue - Y/Y % Change
258% 397% 363% 380% 115% 112% 177% 37% Gross Margin %
60% 60% 62% 62% 62% 63% 62% 65% 68% 70% 73% 69% 75%
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Source: Beacon Securities.
Village Farms (000's) Dec-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Dec-20 Dec-21 Q4/FY17 FY17 Q1/FY18 Q2/FY18 Q3/FY18 Q4/FY18 FY18 Q1/FY19 Q2/FY19 Q3/FY19 Q4/FY19 FY19 Q1/FY20 Q2/FY20 Q3/FY20 Q4/FY20 FY20 FY21 Consolidated Revenue US$32,391 US$153,933 US$28,198 US$41,024 US$40,310 US$34,116 US$143,648 US$28,198 US$41,024 US$40,310 US$34,116 US$143,648 US$28,198 US$41,024 US$40,310 US$34,116 US$143,648 US$143,648 Total COGS US$28,702 US$141,227 US$24,552 US$38,487 US$38,212 US$28,702 US$129,953 US$24,552 US$38,487 US$38,212 US$28,702 US$129,953 US$24,552 US$38,487 US$38,212 US$28,702 US$129,953 US$129,953 Gross Margin US$3,689 US$12,706 US$3,646 US$2,537 US$2,098 US$5,414 US$13,696 US$3,646 US$2,537 US$2,098 US$5,414 US$13,696 US$3,646 US$2,537 US$2,098 US$5,414 US$13,696 US$13,696 Total Operating Expenses US$3,574 US$14,826 US$2,964 US$3,547 US$3,098 US$3,574 US$13,182 US$2,964 US$3,547 US$3,098 US$3,574 US$13,182 US$2,964 US$3,547 US$3,098 US$3,574 US$13,182 US$13,182 Income From Operations US$115
US$683
US$1,840 US$514 US$683
US$1,840 US$514 US$683
US$1,840 US$514 US$514 Other Expenses (Income) Interest Expense US$667 US$2,683 US$609 US$609 US$600 US$590 US$2,408 US$580 US$570 US$560 US$551 US$2,261 US$541 US$531 US$521 US$511 US$2,104 US$1,948 Foreign Exchange Loss (Gain) US$0
US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 Other Expense (Income) US$0
US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 Share Of Loss (Gain) From Joint Venture US$300 US$520 US$400 US$500
US$1
Loss (Gain) On Disposal Of Assets US$0
US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 Pretax Income (Loss)
US$3,394
US$1,807
US$634
US$612 US$4,111 US$4,498 US$4,481 US$4,628 US$6,637 US$11,112 US$26,858 US$44,742 Recovery (Payment) Of Income Taxes
US$19
US$325
US$27
US$335
US$37
US$346
Net Income
US$3,721
US$1,482
US$607
US$1,017 US$3,775 US$4,952 US$4,444 US$5,029 US$7,032 US$10,767 US$27,272 US$45,115 EPS - Fully Diluted
US$0.09
US$0.03
US$0.01
US$0.02 US$0.09 US$0.11 US$0.10 US$0.12 US$0.16 US$0.25 US$0.62 US$1.03 EBITDA (Ex-Pure Sunfarms Share) US$1,877 US$6,868 US$2,420 US$727 US$737 US$3,577 US$7,462 US$2,420 US$727 US$737 US$3,577 US$7,462 US$2,420 US$727 US$737 US$3,577 US$7,462 US$7,462 EBITDA (With Pure Sunfarms Share) US$1,577 US$6,348 US$2,020 US$227 US$1,080 US$4,134 US$7,461 US$2,951 US$1,449 US$2,909 US$6,398 US$13,707 US$6,759 US$6,896 US$8,895 US$13,361 US$35,911 US$53,638 Key Operational Data Revenue - Y/Y % Change
5%
0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Gross Margin % Consolidated 11% 8% 13% 6% 5% 16% 10% 13% 6% 5% 16% 10% 13% 6% 5% 16% 10% 10% EBITDA Margin % (Ex-Pure Sunfarms) 6% 4% 9% 2% 2% 10% 5% 9% 2% 2% 10% 5% 9% 2% 2% 10% 5% 5% EBITDA Margin % (With Pure Sunfarms) 5% 4% 7% 1% 3% 12% 5% 10% 4% 7% 19% 10% 24% 17% 22% 39% 25% 37%
11 Beacon Securities Limited We use a sum of the parts approach in determining our target price for Village Farms. First, we use a DCF for the company’s investment in Pure Sunfarms. Highlights from our DCF include: achieving 9% market share by FY21 (based on the PBO’s midpoint estimate of 734 mt); revenue realized per gram stabilizing at C$4 in Q4/FY19 and beyond; all-in costs of goods sold falling to reach C$1/g in Q1/FY21 and beyond; a discount rate of 12%; and a 0% terminal growth rate post FY21. Incorporating our estimate of net cash as at the valuation date (C$16MM at the end of 2018) this approach results in a total value of C$792MM or C$396MM for Village Farms’ share – or approximately C$9.00 per fully diluted Village Farms share.
Source: Beacon Securities.
(000's) Dec-19 Dec-20 Dec-21 FY19 FY20 FY21 Terminal Value Production Sold (kg) 16,250 47,531 65,000 Revenue C$68,656 C$190,125 C$260,000 Adjusted Gross Margin C$42,819 C$131,666 C$195,000 Overhead Expenses C$21,720 C$35,555 C$39,000 Net Income C$15,613 C$71,122 C$115,440 Capex C$24,000 C$1,000 C$1,000 Free Cash Flow
C$70,122 C$114,440 C$953,667 PV of Free Cash Flow
C$57,817 C$85,035 C$641,407 Price Realized / g C$4.23 C$4.00 C$4.00 COGS / g (all in) C$1.59 C$1.23 C$1.00 Per DCF
Discount Rate
12%
Total PV of FCF
C$776,275
Net Cash (Debt) as at Valuation Date (Q4/FY18)
C$15,698
Total Value
C$791,973
Village Farms' Share
C$395,986
12 Beacon Securities Limited We then value Village Farms’ produce business by applying an EV/EBITDA multiple of 13.0x on EBITDA estimate for the 12 months ended December 2018 (US$7.5MM). This yields a value of C$121MM. We note that the company’s shares traded at an EV/Trailing EBITDA multiple of 12.4x on June 6, 2017, just prior to the announcement that it was entering the cannabis sector. Adding these two components yields a forecast EV of C$517MM. Deducting C$34MM (our net debt forecast as at Q4/FY18) results in a forecast equity value of C$483MM. After adjusting for in the money options and warrants, we arrive at a target price of C$11.00 (rounded).
Source: Beacon Securities.
(000's) Pure Sunfarms Value Of Pure Sunfarms JV C$791,973 Village Farms' Share C$395,986 Produce Business EBITDA (12 months ending December 2018) US$7,462 Multiple 13.0x Value of produce business (US$) US$97,003 US$ to C$ $1.25 Value of produce business (C$) C$121,254 Total Enterprise Value C$517,241 Less forecast net debt (December 2018) C$33,695 Adjustments Fully Diluted Forecast equity value C$483,545 C$3,624 C$487,169 Shares o/s (December 2018) 42,744 2,541 45,285 Target price (rounded) C$11.00 Current price C$7.67 Implied return 43%
13 Beacon Securities Limited Licensing Approval From Health Canada. As shown on slide 17, Village Farms trades at a discount to its peers. We believe much of this is due to the fact that it is currently unlicensed. To comply with the ACMPR, Emerald, on behalf of Pure Sunfarms, has filed the license application with Health Canada. The application has been accepted and is currently under review. We believe that obtaining a cultivation license would make the future cash flows more ‘real’ in the eyes of investors, pushing share prices higher. When the conversion of D3 is fully complete, Pure Sunfarms would be one of the largest commercial cannabis producers in Canada. Increasing Awareness Amongst Investors. Village Farms has largely been under the Street’s radar. Until less than a month ago, the company had no analyst coverage. We suspect that it will continue to increasingly catch the attention of institutional investors, which could result in an increase in the share price. Increase In Capacity Deployed. Pure Sunfarms has options to acquire the conveniently located Delta 2 and Delta 1 greenhouses – a total of 3.7MM more sq. ft. (85 acres). The additional annual yield from these facilities is estimated at 225,000 kg or 3x D3. We believe that if/when these options are exercised, Village Farms’ valuation would see a significant jump. Recall that the primary use of proceeds from Village Farms’ recent C$13.5MM financing was to be able to deliver D2 unencumbered to Pure Sunfarms – should it exercise its right to acquire it. Amendments To ‘Fix’ NAFTA. Mexican competition has hurt the company’s produce business. There are
the playing field versus Mexican competition which benefits from much lower labour costs, could result in improved margins in the company’s produce business and an increase in Village Farms’ share price.
14 Beacon Securities Limited Our official model only incorporates the conversion of the Delta 3 facility (1.1MM sq. ft. (25 acres)) for the cultivation and sale of cannabis. Additionally, we ran potential scenarios for the conversion of Delta 2 (1.1MM
Should Pure Sunfarms exercise its options to acquire D2 and then D1, our ‘blue sky’ analysis suggests Village Farms’ shares could reach C$16.50 and C$26.00, respectively.
Source: Beacon Securities. (000's) Scenarios Actual Model (Only D3) Adds D2 Adds D2 & D1 Pure Sunfarms Steady State Production (kg) 65,000 130,000 290,000 Year Of Steady State Production 2021 2022 2022 Revenue / g C$4.00 C$3.75 C$3.50 Revenue C$260,000 C$487,500 C$1,015,000 Cost / g C$1.00 C$1.00 C$1.00 Net Income C$115,440 C$168,350 C$423,835 Total Conversion Capex C$55,000 C$110,000 C$242,000 DCF Value Of Pure Sunfarms C$791,973 C$1,415,911 C$2,743,099 Village Farms' Share C$395,986 C$707,956 C$1,371,549 Village Farms Share Of Value Of Pure Sunfarms C$395,986 C$707,956 C$1,371,549 Value Of Produce Business C$121,254 C$109,129 C$84,878 Total Enterprise Value C$517,241 C$817,085 C$1,456,427 Less Forecast Net Debt C$33,695 C$34,695 C$36,695 Add In The Money Options/Warrants C$3,624 C$3,624 C$1,419,732 Equity Value, Fully Diluted C$487,169 C$786,013 C$1,423,356 Fully Diluted Shares Outstanding 45,285 48,202 55,146 Implied Value Per Share (Rounded) C$11.00 C$16.50 C$26.00
15 Beacon Securities Limited During the quarter ended Sept 30, 2017, LPs sold 13,574 kg of marijuana to patients – up 89% y/y and 12%
Our calculations peg the size of the medical cannabis industry at C$452MM today, however forecasts call for the industry to reach C$~1.3B over the coming years. We note that the main driver of the industry’s growth over the past few quarters has been marijuana oil. We believe this favours low cost greenhouse growers like Village Farms, which may not be growing a ‘connoisseur bud’, but will be well suited for extraction.
Source: Health Canada, Beacon Securities.
Canadian Medical Marijuana Industry: Historical Growth (left); Forecast (right)
0% 20% 40% 60% 80% 100% 120% 140% 160% 180% $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 2015 2016 2017 2018 2019 2020 Industry Size % Growth
16 Beacon Securities Limited April 13, 2017 was a landmark day in the industry, with the federal government introducing legislation legalizing recreational marijuana. Canadians over the age of 18 (could be higher in certain provinces) will be allowed to possess up to 30 g of marijuana starting this summer. Looking at the actual results from other states where recreational marijuana has been legal for some time, as well as extrapolating the four MOUs from the Government of New Brunswick, projections for the potential size of a legal market in Canada are much larger. The following table summarizes the forecasted retail sales potential in the Canadian recreational market post- legalization.
Rationale Year PBO midpoint estimates, Nov 2016 2018 655,000 kg C$4.9B PBO midpoint estimates, Nov 2016 2021 734,000 kg C$4.9B NB MOUs midpoint estimates, Nov 2017 2018 748,992 kg C$7.7B Government of Canada estimate, late 2017 2017 C$7B - C$8B Washington state TTM sales extrapolation, Oct 2017 2018 C$11.2B Washington state TTM sales extrapolation, Apr 2017 2018 509,760 kg Colorado TTM sales extrapolation, Oct 2017 2018 C$12.1B MPG estimates, Dec 2017 2018 900,000 kg Market Size
Source: Parliamentary Budget Officer, state/provincial/federal governments, Marijuana Business Daily, Beacon Securities.
17 Beacon Securities Limited
Note: VFF and FIRE estimates are Beacon Securities’. Estimates for all other companies are consensus. VFF’s sales and EBITDA are in US$, all other figures in C$. EBITDA for VFF includes share
Source: Company reports, Thomson Reuters, Beacon Securities estimates.
Marijuana Comparables
Year End Village Farms International Inc VFF.TO DEC $7.67 $323
$362 1.9x 2.0x 2.0x 2.0x 2.0x 45.7x 38.9x 21.2x 8.1x 3.0x Other Public Companies Canopy Growth Corp WEED.TO MAR $37.61 $7,092 $520 $6,572 RESTRICTED Aurora Cannabis Inc ACB.TO JUN $12.32 $5,544 $340 $5,204 261.1x 73.7x 18.9x 11.5x 7.1x
47.9x 25.4x 20.7x Aphria Inc APH.TO MAY $22.05 $3,973 $331 $3,642 180.8x 85.0x 17.2x 6.5x 4.7x 856.9x 310.4x 48.7x 19.1x 18.6x MedReleaf Corp LEAF.TO MAR $24.37 $2,454 $124 $2,330 57.7x 50.2x 15.5x 8.3x 7.0x 208.8x 337.7x 45.6x 21.7x 16.5x Cronos Group Inc MJN.V DEC $10.40 $1,593 $68 $1,524 RESTRICTED CannTrust Holdings Inc TRST.CD DEC $11.00 $1,000 $27 $973 46.9x 13.5x 6.1x 8.2x
16.1x 14.8x
CMED.TO OCT $27.82 $680 $40 $639 37.5x 16.7x 8.0x 6.1x
19.7x 11.7x
OGI.V AUG $4.94 $577 $95 $482 63.6x 17.1x 4.9x 3.5x 2.4x
14.4x 9.5x 7.5x The Hydropothecary Corp THCX.V JUL $4.40 $542 $103 $439 RESTRICTED Supreme Cannabis Company Inc FIRE.V JUN $2.65 $500 $39 $461 1003.1x 53.0x 5.9x 2.9x 2.4x
5.9x 4.5x Group Average $2,396 $169 $2,227 235.8x 44.2x 10.9x 6.7x 4.7x 532.8x 188.3x 29.7x 15.5x 13.6x EV/EBITDA EV/Sales 2019E 2020E 2021E 2017E 2017E 2021E 2018E 2020E 2018E 2019E EV (MM) Company Ticker Last Price Market Cap. (MM) Net Cash (MM)
Marijuana Comparables
Village Farms International Inc US$153.9 US$143.6 US$143.6 US$143.6 US$143.6 US$6.3 US$7.5 US$13.7 US$35.9 US$53.6 4.1% 5.2% 9.5% 25.0% 37.3% Other Public Companies Canopy Growth Corp RESTRICTED Aurora Cannabis Inc $19.9 $70.6 $275.7 $451.3 $733.5
$19.3 $108.6 $204.6 $251.4
39.4% 45.3% 34.3% Aphria Inc $20.1 $42.9 $211.3 $563.4 $777.7 $4.3 $11.7 $74.9 $190.5 $195.4 21.1% 27.4% 35.4% 33.8% 25.1% MedReleaf Corp $40.4 $46.4 $150.3 $282.3 $331.2 $11.2 $6.9 $51.1 $107.4 $140.8 27.6% 14.9% 34.0% 38.1% 42.5% Cronos Group Inc RESTRICTED CannTrust Holdings Inc $20.8 $72.0 $158.8 $118.3
$20.8 $60.6 $65.7
38.1% 55.5%
$17.1 $38.3 $80.0 $104.0
$8.4 $32.5 $54.7
40.6% 52.6%
$7.6 $28.2 $97.7 $139.5 $198.0
$5.4 $33.5 $50.7 $64.6
34.2% 36.3% 32.6% The Hydropothecary Corp RESTRICTED Supreme Cannabis Company Inc $0.5 $8.7 $78.1 $160.9 $191.9
$29.6 $77.5 $101.5
48.2% 52.9% Group Average 24% 23% 37% 44% 37% 2020E Company 2017E 2018E 2019E 2021E 2021E 2017E 2017E 2018E 2019E 2020E 2018E 2019E 2020E 2021E Sales (MM) EBITDA (MM) EBITDA Margin %
18
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Does Beacon, or its affiliates or analysts collectively, beneficially own 1% or more of any class of the issuer's equity securities? Yes No Does the analyst who prepared this research report have a position, either long or short, in any of the issuer’s securities? Yes No Does Beacon Securities beneficially own more than 1% of equity securities of the issuer? Yes No Has any director, partner, or officer of Beacon Securities, or the analyst involved in the preparation of the research report, received remuneration for any services provided to the securities issuer during the preceding 12 months? ? Yes No Has Beacon Securities performed investment banking services in the past 12 months and received compensation for investment banking services for this issuer in the past 12 months? Yes No Was the analyst who prepared this research report compensated from revenues generated solely by the Beacon Securities Investment Banking Department? Yes No Does any director, officer, or employee of Beacon Securities serve as a director, officer, or in any advisory capacity to the issuer? Yes No Are there any material conflicts of interest with Beacon Securities or the analyst who prepared the report and the issuer? Yes No Is Beacon Securities a market maker in the equity of the issuer? Yes No Has the analyst visited the head office of the issuer and viewed its operations in a limited context? Yes No Did the issuer pay for or reimburse the analyst for the travel expenses? Yes No All information contained herein has been collected and compiled by Beacon Securities Limited, an independently owned and operated member of the Investment Industry Regulatory Organization of Canada (IIROC). All facts and statistical data have been obtained or ascertained from sources, which we believe to be reliable, but are not warranted as accurate or complete. All projections and estimates are the expressed opinion of Beacon Securities Limited, and are subject to change without notice. Beacon Securities Limited takes no responsibility for any errors or omissions contained herein, and accepts no legal responsibility from any losses resulting from investment decisions based on the content of this report. This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell securities discussed herein. Based on their volatility, income structure, or eligibility for sale, the securities mentioned herein may not be suitable or available for all investors in all countries.
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As at December 31, 2017 #Stocks Distribution BUY 69 75.0% Buy Total 12-month return expected to be > 15% Speculative Buy 13 14.1% Speculative Buy Potential 12-month return is high (>15%) but given elevated risk, investment could result in a material loss Hold 9 9.8% Hold Total 12-month return is expected to be between 0% and 15% Sell 0.0% Sell Total 12-month return is expected to be negative Under Review 1 1.1% Tender 0.0% Tender Clients are advised to tender their shares to a takeover bid or similar offer Total 92 100.0%