Village Farms International: Sustaining Cannabis EBITDA Margins Village Farms International: Sustaining Cannabis EBITDA Margins

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By Ronald Tech

With the cannabis sector undergoing dynamic changes, Village Farms International VFF is emerging as a significant player, poised for considerable growth. Senior analyst Pablo Zuanic, from Zuanic & Associates, highlights pivotal catalysts driving VFF forward in the ever-evolving cannabis market.

“From an investment perspective, we continue to believe the stock is attractively valued at 0.5x EV/current sales on the aggregate, and with the cannabis unit valued at 3.3x EBITDA our CY25 estimates,” Zuanic wrote.

Consistent Growth And Promising Prospects

VFF distinguishes itself with sustained cannabis EBITDA margins in the high teens, demonstrating robust operational performance.

Significantly, the company exhibits consistent free cash flow generation, solidifying a trend evident in 3Q23 after a period of fluctuation.

Resurgence in the Domestic Market

An encouraging rebound in domestic recreational market share trends positions VFF favorably. Momentum has surged since July ’23, with VFF posting remarkable sales growth in 4Q23, surpassing top competitors.

According to Hifyre scanner data, VFF’s sales growth in 4Q23 reached $89.5 million, marking a significant achievement in the competitive landscape of the cannabis sector.

Analyzing Canadian Market Dynamics

While challenges such as market deceleration and pricing fluctuations persist, VFF maintains a resilient position.

In addition to Village Farms International, several other key players in the cannabis sector were highlighted in the report.

Among these, notable companies include Tilray Inc. TLRY, Decibel Cannabis Company Inc. DBCCF, Organigram Holdings Inc. OGI, Cronos Group Inc. CRON, and Auxly Cannabis Group Inc. CBWTF.

Regional Performance And Diverse Product Mix

  • VFF’s sales distribution across provinces underscores its diverse market penetration strategy. Noteworthy is the company’s adeptness in adapting product offerings to regional preferences, ensuring a competitive edge.
  • In 4Q23, the format mix comprised 78% flower, 18% pre-rolls, 4% vape, and 1% edibles, inclusive of QC. This distribution remained consistent with 4Q22.
  • Sequentially, flower sales increased by 12%, with VFF experiencing a 9% increase, while pre-roll sales saw a 3% increase.
  • Notably, in QC, flower sales accounted for 89% of total sales, while pre-rolls accounted for 11%.
  • Pure Sunfarms’ format mix consisted of 73% flower, 21% pre-rolls, 5% vape, and 1% edibles.
  • According to Hifyre data, QC represents approximately one-third of VFF’s flower business and only 17% of its national pre-roll business.
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Pricing Trends

  • The average price for the Pure Sunfarms (PSF) portfolio in 4Q23 stood at $4.12 per gram, compared to $4.34 in 3Q23 and $4.42 in 4Q22 (with $5.30 in 4Q21).
  • This marks a 22% drop over two years, aligning with the overall market flower price decline. Specifically, in 4Q23, the market average was $4.95, down from $5.52 in 4Q22 and $6.37 in 4Q21.
  • Year-over-year, VFF’s prices decreased by 7%, contrasting with the market’s 10% decrease.
  • Notably, VFF’s price decline is attributed to brand mix-related factors, with prices for specific brands remaining relatively stable despite the overall market fluctuations.

Challenges And Opportunities In Pre-Roll Segment

Despite challenges in the pre-roll segment, VFF exhibits resilience, steadily increasing its market share. However, the absence of a presence in the infused pre-roll segment underscores a potential area for growth and expansion.

Strategic Product Portfolio Optimization

VFF’s strategic approach to product diversification and brand expansion underscores its commitment to meet evolving consumer demands. According to Zuanic, the introduction of new brands and SKUs reflects a proactive stance in capturing market share.

Anticipated International Expansion

Anticipation builds around positive developments on the international front, including export growth momentum and strategic investments, promising broader market access for VFF.

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