Village Farms International (TSX: VFF) is one of the largest and longest-operating greenhouse growers in North America. The Company leverages decades of experience in large-scale, low-cost intensive agriculture as a vertically integrated produce supplier to pursue high-value, high-growth plant-based Consumer Packaged Goods opportunities in cannabis and CBD in North America and select markets internationally.

Key Highlights

• Encouraging Top-line performance: In Q3 2021 the company reported strong top-line growth at USD 72.4 million, as compared to USD 43.0 million in the previous corresponding period. An inclusion the Canadian cannabis and U.S. cannabis revenues post acquisition were the main reason behind higher revenue. The company’s favorable brand performance and higher market share also played a crucial role.

• Favoring conditions in the United States: The company is encouraged by the federal cannabis bill recently brought forward by Senate leadership and view it as an integral step in the process of regulatory change that would allow it to participate in the high-THC cannabis market in the U.S.

• Acquired Québec-Based ROSE LifeScience: Recently, the company stated that it acquired 70% ownership of privately held, Québec-based, ROSE LifeScience, a leading vertically integrated branded cannabis producer, supplier and commercialization expert in the Province of Québec. We believe this acquisition adds a substantial presence for the company in the Province of Québec, which represents approximately 15% of total Canadian retail cannabis sales.
  

• Improving margins on sequential basis: The company managed to improve its margin matrix on the sequential basis on the back of robust performance from Pure Sunfarms, as well as a partial quarter's contribution from the acquisition of Balanced Health Botanicals, and improved results in the Village Farms Fresh Produce business. The chart below reflects the pattern.

Source: REFINITIV, Analysis by Kalkine Group

 Financial overview of Q3 2021 (In thousands of United States dollars)

Source: Company Reports

• The company announced its quarterly results, wherein it reported sales of USD 72.4 million, jumped from USD 0 million in pcp. The increase was driven by strong growth from the Cannabis segment.
• Gross profit stood at USD 17.7 million, which climbed from USD 5.6 million in pcp, supported by elevated sales, partially offset by higher cost of sales.
• The quarter was marked by significantly higher selling, general and administrative expenses, an increase in interest expense, and higher share-based compensation.
• In the reported period the company’s net income was of USD 0.7 million against USD 0.5 million in pcp.

Risks associated with investment

The Company operates under difficult market conditions, which may have an impact on operations and financial performance. Any change in rules or government policies might have an impact on the Company's overall operations. Furthermore, disruption in the supply chain, inability to sustain pricing and inventory models, lack of long-term client commitments, etc. are some other key risks. 

Valuation Methodology (Illustrative): EV to Sales  

Stock recommendation

VFF is one of Canada’s best Selling Cannabis Brands, which offers products like dried flower, vapes, bottled oil etc. Moreover, the recent acquisition of BHB would expands the company’s footprint across the US market, wherein the opportunity for hemp-derived CBD products remains very high. Furthermore, the company is continuously monitoring the developments in cannabis legislation in U.S. and is seeking for an opportunity to leverage its exceptional U.S. greenhouse operations for the U.S. high-THC market, when permitted to do so. Additionaly, the company also acquired 70% ownership in Québec-based, ROSE LifeScience, which added a substantial presence in the Province of Québec. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 8.44 on December 6, 2021. We have considered Hexo Corp, Valens Company Inc, Agrify Corp, etc. as the peer group for comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

One-Year Technical Price Chart (as on December 6, 2021). Source: REFINITIV, Analysis by Kalkine Group

Spark Power Group Inc 

Spark Power Group Inc (TSX: SPG) is independent provider of end-to-end electrical contracting, operations and maintenance services, and energy sustainability solutions to the industrial, commercial, utility, and renewable asset markets across North America. 

Key highlights

• Growing revenues: The company posted higher revenue in Q3 2021, which stood at CAD 69.0 million, compared to CAD 61.4 million in the previous corresponding period, representing an increase of CAD 7.6 million or 12.3%. The primary reason for the change was due to organic growth in the Renewables business unit that experienced organic growth of CAD 6.4 million or 37.6% and an increase in Sustainability revenue of CAD 1.4 million or 68.9%.

Source: Company Filings

• Experiencing positive signs of revival: The company experience an increase in demand on its services, which is a crucial plus. Its job site protocols, customer policies and the ongoing jurisdictional regulations have all had an impact on overall efficiencies in operations. While management expects to realize improvements in the coming quarters. The company is seeing increased new bookings, which is being aided by better business circumstances. Furthermore, the management is anticipating higher margins owing to decreased COVID-19 protocol expenses.
  

• Grabbed several projects: In Q3 2021, the company was awarded numerous large projects with new and existing customers in both Canada and the United States. The business anticipates that these additional agreements will result in longer-term, repetitive repair and maintenance opportunities on these sites, hence fueling the company's long-term cash flows.

Financial overview of Q3 2021 (In 000 of CAD)

Source: Company

• In Q3 2021, the company’s posted revenue increased 12.3% to CAD 68.9 million, against CAD 61.4 million in the previous corresponding period. The group reported higher revenues as it witnessed healthy performance from every segment.
• Gross profit declined to CAD 12.7 million, compared to CAD 17.9 million in pcp, mainly due to higher cost of sales.
• The company posted loss from operations at CAD 1.5 million, against an income of CAD 3.8 million in Q3 2020, primarily attributable to increase in selling, general and administrative costs.
• The net loss in the reported period stood at CAD 2.8 million compared to profit of CAD 2.0 million, mainly due to higher other expenses coupled with loss from operations.
  

Risks associated with investment

The company reported a surge in its total debt due to working capital requirements, capital expenditures and debt service requirements. Continuation of the above trend would lead to higher finance costs, which would further dampen the company’s profitability.

Stock recommendation

In the third quarter, the company demonstrated strong operating performance, with double-digit revenue growth, positive trending gross margin realizations, and the impact of scale on the SG&A cost structure, which fell to 17.6% on an adjusted basis. Furthermore, the company is seeing evidence of a steady recovery to pre-pandemic levels of operations and good trends, which is a major plus. Furthermore, the company has been awarded numerous important projects in both Canada and the United States with new and old customers, which we expect will provide new cash flow opportunities in the near future. On the valuation front the stock is trading at EV to sales multiple at 0.72x compared to an Industry median of 1.7x. Hence considering the above-mentioned rationales and discounted valuations we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 1.57 on December 6, 2021.

Technical Analysis Summary:

1-Year Price Chart (as on December 06, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.