Cannabis grower Village Farms International (Village Farms International Stock Quote, Chart TSX:VFF) has scored its first provincial supply agreement, while current (and likely continuing) shortages in the recreational cannabis market will mean more business for sizeable producers like VFF, says analyst Martin Landry of GMP Securities.
On Friday, Village Farms announced a supply agreement with the province of Ontario's Ontario Cannabis Store (OCS) for an undisclosed quantity to be supplied by its 50 per cent owned joint venture Pure Sunfarms.
"We are thrilled to be working with the OCS in Canada's most populated province and look forward to finalizing additional supplier agreements for other provinces and growing the Pure Sunfarms brand nationally," said Mandesh Dosanjh, VFF's President and CEO, in a press release.
Landry says Pure Sunfarms will continue selling its cannabis in the wholesale spot market to other licensed producers while it looks for further provincial agreements.
"While margins for wholesale sales are likely attractive, we expect that [Pure Sunfarms] will be able to increase its margin capture by selling directly into the recreational market," says Landry, in a flash update to clients on Friday.
Landry notes that the joint venture expects to reach a run rate production of 75 tonnes of cannabis by mid-2019 and expects to produce about 46 to 52 tonnes in 2019, with the analyst estimating that it will sell 32.5 tonnes in 2019.
Landry is maintaining his "Buy" rating and $9.50 target for VFF, noting the following details. First, Village Farms has 30 years of experience in greenhouse growing to retailers with strict quality standards. Second, he expects the supply and demand imbalance to continue in Canada in the next year, a situation which favours existing licensed producers such as VFF. Third, Landry says that VFF's shares are trading at about 8x 2020 EBITDA, which he believes does not reflect the company's potential expansions into the United States.
The analyst's $9.50 target represented a projected 12-month return of 6.3 per cent at the time of publication.