Village Farms International Inc. (NASDAQ:VFF) recently reported its financial results for Q4 2022 in which revenue was $69.5 million, a decrease of 5% compared to $72.4 million in Q4 2021.

Michael DeGiglio, Village FarmsCEO, commented on Thursday: "The fourth quarter of 2022 once again demonstrated the momentum in our Canadian cannabis business as investments in new brands and product innovations contributed to 25% year-over-year growth in retail branded sales and our 17th consecutive quarter of positive adjusted EBITDA."

The Analyst

Cantor Fitzgerald's Pablo Zuanic confirmed an Overweight rating on the company but lowered his 12-month price target to US$4.15 from US$7.25 due to the sector rating downgrade and the lower value assigned to assets that are not cannabis.

The Thesis

According to Zuanic, if Canada's recreational market "is a war of attrition, we believe VFF is well-placed to win and continue to gain market share, given its low-cost structure and recognized flower quality."

He added: "Conservatively valuing the non-cannabis assets at $135Mn and taking the cannabis piece at 2.5x (we estimate the cannabis portion of Tilray (NASDAQ: TLRY) and Canopy Growth (NASDAQ:CGC) is valued at 4-5x sales), we derive a 12-month price target of $4.15."

About 4Q: Focusing on the marijuana piece, the analyst noted in January and February average daily sales pointed to +6% QoQ subjacent growth for 1Q23.

With an adjusted gross margin of 40%, the company's produce EBITDA was -$3Mn, and corporate EBITDA was -$3.6Mn. "We project capex below $10Mn for CY23 after >$14Mn in CY22 and $22Mn in CY21," Zuanic noted.

Outlook: According to the analyst's view, the company has a brand for each price segment.

"Soar for a premium; Pure Sun Farms for core; and Fraser Valley for value." Moreover, the Hifyre data shows "VFF total flower sales grew 30% seq in 4Q22, with PSF 68% of flower sales vs. 91% in 3Q22, and Fraser Valley 13% vs. 7%."

Village Farms, which has started shipping to Israel and Australia and could soon enter Germany later this year, expects exports to account for 10% of revenue in CY23. Even before federal legalization, the company can also look for ways to enter the cannabis market in the U.S.

Valuation And Price Target

In Zuanic's opinion, the recent volatility in the sector makes discussions of price targets and multiple valuations less relevant.

""We calculate an EV of C$184Mn, on a market cap of C$140Mn (US$0.91 x 110mn shares), financial net debt of $34Mn, and net leases of C$10Mn," Zuanic concluded.

Pablo Zuanic will be speaking at the April Cannabis Capital Conference in Miami. Come and meet him in person as well as other fascinating individuals in the cannabis industry at the Benzinga Cannabis Capital Conference at Miami Beach's historic Fontainebleau Hotel in Florida on April 11-12. This is the place to get DEALS DONE, raise money, jumpstart M&A, and meet investors and key partners. Secure your tickets now before prices go up.

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