Village Farms Increases Licensed Cannabis Footprint, On Track for More Value-Driving Milestones This Year

Village Farms International (TSX: VFF) (OTCQX: VFFIF) owns 50% of Pure Sunfarms, a joint venture with Emerald Health Therapeutics (TSX-V: EMH) (OTCQX: EMHTF), which is rapidly becoming one of the largest single site cannabis operations in Canada by retrofitting 1.1 million square feet of existing agricultural greenhouse space to capitalize on the imminent legalization of adult-use this fall. Combining Village Farms’ proven mega-scale greenhouse operating expertise with Emerald Health’s genetics and regulatory know-how, Pure Sunfarms is primed to join the top tier of Canadian licensed producers with a raft of catalysts anticipated throughout the remainder of 2018 and 2019.

Pure Sunfarms received its initial cultivation license in March and is rapidly ramping up production.  The company just received a license amendment, allowing it to expand utilization out to 225,000 sf.  By the end of the year, the company anticipates having all 1.1 million sf converted for production and licensed and ramping to full production, with the addition of post-production extraction capabilities.

From Zero to Huge in Less Than One Year

Licensed producers across Canada have been scrambling over the last several months to increase capacity ahead of an anticipated shortfall in supply once full legalization hits. With the date now set for October 17, 2018, reality is quickly setting in. In some ways, the game has changed from “Who can fund the most space?” to “Who can hit the ground running, and reliably, with scale?” Many licensed producers are building facilities from scratch, and there are inherently a lot of hurdles to overcome in order to keep large-scale construction on time and on budget. Even with facilities in place, producers need to scale up operations and learn how to successfully and consistently grow high quality products on an industrial scale.

Commercial-scale cannabis production is well underway at Pure Sunfarms’ Delta 3 greenhouse.

Pure Sunfarms’ quick ramp up is made possible in part by having already demonstrated the ability to successfully grow mega-scale commercial crops onsite over the last two decades. Prior to conversion, the 1.1 million sf facility was cranking out millions of tons of tomatoes annually. With all of the infrastructure and management and labour experience in place, Pure Sunfarms removes most of the guesswork and uncertainty facing much of the industry.

As the wholesale and retail models are set and enacted by provinces throughout Canada, there remains the distinct likelihood of a supply shortfall in the first year or two of adult-use legalization until producers are successfully able bring their anticipated capacity online. Hitting the ground running, as Pure Sunfarms is doing, could be crucial for a company’s success in establishing and expanding its position in the emerging market.

A Promising Second Half of 2018 for Pure Sunfarms

The company’s cultivation expansion appears on pace, again with the stated goal of having all 1.1 million sf of retrofitted greenhouse space available for production by the end of the calendar year. To get there, the company will need to receive more amendments to its cultivation license, allowing it to add more and more capacity. Pure Sunfarms also expects to receive its sales license and to immediately begin selling product upon receipt.

The company has an initial supply agreement in place with Emerald Health, under which Emerald will purchase 40% of the company’s production in 2018 and 2019. Pure Sunfarms is actively pursuing similar agreements with other LPs, distributors, and government entities. Rather than diving directly into the retail market, initially the company has decided to focus on getting high quality, low cost production right. Pure Sunfarms, however, does have a plan to become a vertically integrated supplier with its own brands and its own products.

Industry Observers Taking Note

With the charge toward full legalization in Canada, and the aggressive expansion plans by licensed producers to meet the expected demand, company valuations have grown tremendously over the last year or so. A few licensed producers sport caps north of $1 billion (some well north of this mark), built to a large degree on speculation as to their ability to successfully ramp up small grow to massive agricultural operations. Village Farms (market cap of ~C$219 million), falls into the next tier of producers, with potential head room for growth based on its plans to become one of the largest producers, with the advantage of decades of growing at scale.

There is a valuation argument to be made. For instance, according to analysis by leading Canadian independent investment dealer Echelon Wealth Partners, Village Farms has a price target of $15 compared to its current price of $4.92 (as of 7/25/18). The analysis utilizes conservative production estimates (even more conservative than management’s own conservative numbers) and revenue/valuation multipliers common to the industry and the company’s peers.  And Village Farms has the potential to convert even more of its existing greenhouses from food to the higher-margin cannabis crops — up to another 3.7 million sf, which would more than triple the capacity of Pure Sunfarms.

Disclaimer

The above article is sponsored content. Emerging Growth LLC, which owns CannabisFN.com and CFN Media, has been hired to create awareness. Please follow the link below to view our full disclosure outlining our compensation: http://www.cannabisfn.com/legal-disclaimer/

About Robin Lefferts