Village Farms International Inc: This Non-Pure-Play Pot Stock Could Be an Opportunity

VFF stockA Pot Stock Most People Likely Haven’t Considered

At first glance, Village Farms International Inc (NASDAQ:VFF) does not seem like the typical pot stock. The company has been around since 1989; for most of its history, it was a greenhouse operator known for producing tomatoes, bell peppers, and cucumbers.

But all that changed in 2017, when the company formed a joint venture with Emerald Health Therapeutics Inc (OTCMKTS:EMHTF, CVE:EMH) for large-scale cannabis production. The joint venture, named Pure Sunfarms Corp., has become one of the largest vertically integrated cannabis producers in Canada.

In 2019, Pure Sunfarms’ 1.1-million-square-feet Delta 3 facility in the Canadian province of British Columbia produced approximately 50,000 kilograms (110,231 pounds) of pot.

Moreover, the facility has seven extraction rooms in a new processing center that are capable of processing 35,000 kilograms (77,162 pounds) of biomass annually. The processing center is designed for full EU GMP compliance and certification. (Source: “An Unmatched Platform For The International Cannabis Opportunity,” Village Farms International Inc, last accessed October 1, 2020.)

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Of course, since Canada legalized recreational pot for adult use in October 2018, quite a few companies have entered this new industry, so there is certainly competition.

However, Pure Sunfarms still stands out because it is one of the lowest cost producers. In the second quarter of 2020, the company’s all-in cost to produce one gram of cannabis was just CA$0.84. (Source: “Village Farms International Reports Second Quarter 2020 Financial Results – Pure Sunfarms Achieves Sixth Consecutive Profitable Quarter on 89% Sequential Increase in Retail Branded Sales Volume – Produce Business Generates Positive Adjusted EBITDA,” Village Farms International Inc, August 12, 2020.)

And even though there are more well-known players in the Canadian cannabis industry, Pure Sunfarms managed to capture a meaningful portion of the market. For instance, Pure Sunfarms is the top selling brand of dried flower products with the Ontario Cannabis Store, which is the provincial wholesaler and only online retailer of cannabis in Ontario—Canada’s most populous province.

Another thing that makes Pure Sunfarms special is its ability to generate recurring profits.

You see, the legal cannabis industry is still at an early stage. And, as is the case with many nascent industries, it’s not uncommon to see cannabis producers experiencing losses quarter after quarter. Pure Sunfarms, on the other hand, is one of the very few profitable Canadian licensed cannabis producers.

In fact, the second quarter of 2020 marked the company’s sixth consecutive quarter of positive net income and seventh consecutive quarter of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

Obviously, because Pure Sunfarms is a joint venture, Village Farms International Inc only gets a share of the profits from this cannabis producer. At the time of this writing, VFF owns 58.7% of the joint venture.

But that should be about to change. On September 8, Village Farms announced that it would acquire 36,958,500 common shares of Pure Sunfarms owned by Emerald Health Therapeutics for CA$79.9 million.. Those shares represent 41.3% of the outstanding shares of the joint venture. (Source: “Village Farms International to Acquire All Pure Sunfarms’ Shares it Does Not Currently Own – Will Own 100% of Canada’s Premier Cannabis Supplier Upon Completion of Transaction,” Village Farms International Inc, September 8, 2020.)

In other words, once the deal goes through, VFF would own 100% of the cannabis producer. The transaction is expected to close in late October 2020. Management said that the transaction would be immediately accretive to Village Farms International Inc’s net income.

“With this transaction, Village Farms and its shareholders will fully participate in the financial success of Canada’s premier cannabis supplier, and Village Farms will be able to fully leverage the success of Pure Sunfarms, as well as our decades of experience and deep organizational capabilities, for our cannabis and CBD ambitions in the U.S and selected markets internationally,” said VFF’s chief executive officer, Michael DeGiglio, in the press release.

And this is all happening at a time when Pure Sunfarms is tapping into the Cannabis 2.0 market, which includes derivative products like edibles, vapes, and infused beverages.

On September 23, Village Farms International Inc announced that Pure Sunfarms has launched vape and oil products in Ontario, British Columbia, and Alberta. (Source: “Village Farms International Announces Availability of Pure Sunfarms’ Vape and Oil Products to Consumers in Ontario, Alberta and British Columbia,” Village Farms International Inc, September 23, 2020.)

One week later, VFF announced that Pure Sunfarms has received Health Canada’s approval to begin cannabis extraction operations. This means the pot producer can now start internal extraction operations for its recently launched vape and oil products, and for the additional derivative products it has in the pipelines. (Source: “Village Farms International Announces Pure Sunfarms’ Receipt of Health Canada Approval Enabling It to Commence Cannabis Extraction Operations,” Village Farms International Inc, September 28, 2020.)

Village Farms International Inc (NASDAQ:VFF) Stock Chart

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Analyst Take

Like a lot of pot stocks, Village Farms International Inc saw its shares tumbling during the market sell-off earlier this year. While VFF stock has now climbed out of its March lows, it has yet to make a full recovery. For investors who want a piece of the action in the booming cannabis industry, this greenhouse operator—which is expected to have a prominent cannabis producer as a wholly owned subsidiary soon—deserves a serious look.