Village Farms Has An Extremely Low Valuation (NASDAQ:VFF)

I last wrote about Village Farms (NASDAQ:VFF) in August, after their Q2 report. The stock has declined recently after rising a lot. It is now a bit lower than when I wrote the piece, calling it still cheap.

In Q4, Seeking Alpha hosted a value-stock contest. I could have gone with Village Farms, but I went instead with Organigram (OGI), then $1.15. I described why the stock was a great stock for value investors. It was! Organigram has rallied to above $2. Here is how VFF and OGI have done since mid-October, when I shared the piece:

In 2024, OGI has rallied 54%, while VFF has declined 6%. I own no Organigram currently in my model portfolio that I share in my investing group, but I own a lot of Village Farms.

Ahead of the Q4 report on Wednesday, I am providing an updated look at the stock, which is currently the largest position in my model portfolio at 19%. I boosted it by 14% at $0.73 on Friday.

Village Farms in 2023

Village Farms reported its Q3 in early November. The company saw overall sales decline slightly from a year ago, but adjusted EBITDA was higher than expected. For the first three quarters, overall revenue fell 6%. The overall operating loss fell substantially to $9.3 million. Excluding an impairment and a write-off in a joint venture in 2022, the operating loss then was $34 million.

In Q3, the Canadian cannabis business saw revenue decline 5% from a year earlier. In the first three quarters, its revenue was slightly higher and represented 39% of overall revenue. The gross margin of $29.1 million represented 76% of the overall gross margin. The adjusted EBITDA of $13.3 million was 152% of overall adjusted EBITDA.

In Q3, one of the highlights was a big improvement in operating cash flow to $12.1 million. Year-to-date, it was $6.8 million, a radical improvement from the use of $13.3 million in the first three quarters of 2022. The free cash flow, subtracting the purchases of property and equipment of $4.4 million, was $2.4 million.

Analysts, according to Sentieo, expect flat revenue at $70 million in Q4 and adjusted EBITDA of $3 million. For the full year, they expect that the company generated $281 million revenue, down 4%, with adjusted EBITDA of $11 million, up a lot from 2022, when the company had adjusted EBITDA of -$21 million. While the revenue projected is below the $288 million that was expected when I wrote the piece in October, the adjusted EBITDA projection has soared from $4 million.

The Outlook for Village Farms

The 5 analysts expect overall revenue in 2024 to grow 7% to $300 million. Adjusted EBITDA is projected to grow 29% to $14 million. In October, ahead of the Q3 report, they were expecting revenue of $295 million and adjusted EBITDA of $7 million. Just ahead of the Q3 report in November, the outlook was for revenue of $298 million with adjusted EBITDA of $12 million. So, by both metrics, the expectations have improved.

In 2025, 2 of the analysts are forecasting that revenue will increase 12% to $337 million, with adjusted EBITDA of $23 million. Ahead of the Q3 report, they were projecting revenue of $330 million and adjusted EBITDA of $28 million. The revenue expectation has increased, while the adjusted EBITDA projection has declined. It is still a big increase over the 2024 outlook.

The Village Farms Chart

I previously pointed out a gap in the trading created when the company reported its Q2 in August, and it is still open:

The stock shot up in September with the rest of the cannabis sector following the late-August revelation that the Department of Health & Human Services had recommended that the DEA reschedule cannabis from Schedule 1 to Schedule 3. This has no impact on VFF. The stock sold off but has held its multi-year low set in early August. I see support on this chart at $0.60, which would be below the gap, and resistance at $1.00, the NASDAQ minimum.

Looking at the past 5 years, the stock has declined substantially over the past 3 years:

There is still a gap above (the green arrow) from early 2023, when the company sold stock at $1.35 with warrants at $1.65. That gap is to $1.45 and would represent a doubling of the price if filled.

The Very Low Valuation of Village Farms

In a bear market, such as what the cannabis market is currently experiencing since early 2021, tangible book value can help investors assess downside risk. Village Farms had a tangible book value of $219.4 million at the end of Q3, which works out to be $1.99 per share. The current stock price is just 36% of tangible book value. Ordinarily, stocks that trade at very low multiples of book value are heavily in debt and/or losing money. The net debt of VFF was only $22.4 million at the end of Q3. At the end of 2022, it had net debt of $36.7 million (before the capital raise). The current ratio of 2.2X suggests no liquidity issues. The company has positive adjusted EBITDA and free cash flow in 2023.

The current enterprise value of $101.8 million is just 9.3X the projected adjusted EBITDA for 2023 and 8.5X the projected adjusted EBITDA for 2024. It works out to be just 4.4X the projected adjusted EBITDA for 2025.

While it could get to tangible book value, my target is for 75% of tangible book value, or $1.49. This would be 107% above the current price. It works out to 8.1X projected adjusted EBITDA for 2025, which seems awfully low. My target would represent a fill of the gap created in January of 2023 when it sold units, but it is below the exercise price of those warrants.

Village Farms Is Not Organigram

As I mentioned above, I picked Organigram and not Village Farms for that value contest in Q4. Organigram has done very well since then. I have followed both companies for a long time. The Organigram story was more compelling to me then. That company is a pure-play cannabis company that was trading at just 45% of tangible book value then. It had cash and no debt. The company had a very substantial non-industry owner, British American Tobacco (BTI). While Village Farms trades at a slightly lower price to tangible book value, it’s not a pure-play. It also has a small amount of net debt. It has no outside investor or strategic partner. It’s also not in the New Cannabis Ventures Global Cannabis Stock Index due to its low trading volume.

After BTI raised its stake at a premium in January, OGI shot up. It now trades 0.9X tangible book value. It has an enterprise value of C$178 million, based on its current stock price and the issuance of 12.9 million shares to BTI for C$41.5 million. This works out to 11X projected FY25 adjusted EBITDA, a big premium to Village Farms.

So, Village Farms is lacking some of the things that I really like about Organigram, but it is much cheaper. Things could change! I am not counting on it, but the company could sell off its CBD business and its produce business. It could also attract an outside investor.

Conclusion

I really like VFF. It does have some risks, like the potential delisting due to being less than $1 and in violation of NASDAQ rules. NASDAQ is the only listing. I think that the company can avert delisting by reverse-splitting, but investors tend to be negative about that process. Another risk is that the Canadian market is maturing now that it has been legal for adult-use for more than five years. It has moved to other markets outside of Canada, like Israel, the UK and Germany.

It’s kind of crazy to me that this company trades at less than 40% of tangible book value. It doesn’t have too much net debt, and it is generating positive adjusted EBITDA and free cash flow. While it may not be another Organigram, it has the potential to rally significantly.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.