Initiating Coverage - Village Farmsvillagefarms.com/wp-content/uploads/2015/08/VFF-2018-01... · 2018-01-19 · Beacon Securities Limited 3 Established in 1987, Village Farms is one

January 18, 2018

Initiating Coverage

Village Farms International, Inc.VFF-TBUY – Price Target C$11.00

Current Stock Price: C$7.67Potential Return: 43%

Beacon Securities Limited

It Takes A Village To Raise A CropVahan AjamianAnalyst - 416.643.3879

[email protected]

mailto:[email protected]

Why We Like Village Farms

2Beacon Securities Limited

Management knows how to grow high quality production at scale and low cost. The industry is seeing many players announcelarge scale greenhouse expansions and applying substantial valuations to their shares. Some of these players have not yet sold agram of production grown in a greenhouse. Accordingly, we suspect some will be hit with challenges in scaling production whilealso switching building types from indoor to greenhouse. While it will take Village Farms some time to adjust to the specifics ofgrowing cannabis as well, we believe that its team, which has been growing a variety of crops together in the same facility forover a decade promises investors lower execution risk relative to peers – especially since it can leverage the knowledge of its JVpartner, Emerald Health Therapeutics Inc. (EMH-V, not covered), which was originally licensed by Health Canada almost fouryears ago.

Management’s under-promising leaves room to over-deliver. Management is projecting yields of 75,000 kg in a 1.1MM sq. ft.greenhouse (Delta 3 – D3). This rate is meaningfully lower than most of the company’s peers are projecting. While we seecompelling value in Village Farms’ shares even at a run rate of 65,000 kg for Pure Sunfarms, there is clearly the potential for thecompany to significantly surpass these figures.

There is an underlying business that ‘pays the bills’. Despite the Mexican competition, which has driven the company’s EBITDAmargins over the past decade from ~10% to ~5% currently, management has found a way to control costs and still generatepositive free cash flow after debt repayments. Furthermore, in what will be critical when selling cannabis to provincialgovernments, the team already knows how to sell to large demanding customers as it has sold to Walmart, Costco, Loblaws etc.for years (i.e., has experience with on time delivery, logistics, IT integration, dealing with sometimes finnicky customers, etc.).

Good shareholder base and a tight cap structure. Village Farms has only 42.0MM shares outstanding, and 44.6MM on a fullydiluted basis. Insiders own 26% of the company. We believe institutional investors hold a much larger percentage of its sharesthan is the case for most of its peers.

Incredible optionality. Pure Sunfarms has the option to acquire Delta 2 (D2 – 1.1MM sq. ft.) and/or Delta 1 (D1 – 2.6MM sq. ft., thelargest greenhouse in North America). The values at which these greenhouses would be acquired by the JV have already beenset at undisclosed amounts, which we believe are higher than the C$20MM paid for D3. Critically, Village Farms can maintain its50% share in the JV simply by ‘throwing greenhouses’ at it as opposed to being forced to fund it with cash and diluting investors.While the company has no plans to cultivate cannabis in the U.S. until it becomes federally legal, the potential to one dayconvert its 5.7MM sq. ft. of greenhouses in Texas represents a free call option for investors.

Intro To Village Farms


Established in 1987, Village Farms is one of the largest and longest-running greenhouse growers in North America. Itproduces and distributes premium quality tomatoes, bell peppers, and cucumbers to national grocers, primarily retailsupermarkets and fresh food distribution companies, in the U.S. and Canada.

With crop growing practices that are environmentally sustainable and resource-efficient, the company leads thegreenhouse vegetable industry in North America in terms of sales, distribution, and marketing. This is achieved through thebusiness’ focus on building and maintaining strong customer relationships, and upholding the highest standards of foodsafety.

Source: Company reports, Beacon Securities.

The company owns and operates seven large-scale greenhouse facilities in BC and Texas,and has partnered with greenhouses in BC,ON, and Mexico, enabling it to service itscustomers with fresh produce 365 days a yearreliably.

Products are grown hydroponically, usingcoconut fibre and rockwool, in a glass-enclosed structure with proprietary technologythat regulates climate conditions and yieldsconsistent, high-quality produce that fetches apremium price.

Seeing margins on produce decline overthe past few years due to competitionfrom Mexican producers, the companyhas proactively decided to branch outinto cannabis.

(US$, 000's) FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 LTM

Revenue $130,524 $144,768 $164,448 $133,942 $137,635 $136,615 $141,934 $155,502 $158,850

Gross Margin $14,765 $21,136 $23,821 $7,977 $18,272 $13,885 $13,756 $14,724 $14,434

EBITDA $8,740 $15,272 $15,759 $1,529 $12,965 $8,778 $10,193 $9,385 $8,272

Gross Margin % 11% 15% 14% 6% 13% 10% 10% 9% 9%

EBITDA Margin % 7% 11% 10% 1% 9% 6% 7% 6% 5%

Pure Sunfarms: Village Farm’s Cannabis

Initiative


On June 6, 2017, Village Farms announced that it had entered into a JV with an existing LP, Emerald, to form Pure SunfarmsCorp. for the pursuit of cannabis production in Canada. Management will not conduct any cannabis growing operationsin the U.S. until it is federally legal.

With Village Farms’ expertise in low-cost greenhouse growing and Emerald’s cannabis compliance/licensing as well asintellectual property, the resulting new corporation is expected to develop and sell high-quality, low-cost cannabis at alarge scale.

To initiate the JV, Village Farms has contributed a 1.1MM sq. ft. greenhouse facility in BC (the “Delta 3” greenhouse, or D3),determined to have a fair value of C$20MM. Emerald has agreed to match this amount in cash to fund the conversion ofthe facility, resulting in a 50% interest for each (in the form of common shares).

Pure Sunfarms has commenced conversion of one quarter (Q1, ~250,000 sq. ft.) of its Delta 3 facility for the cultivation ofcannabis – the license for which is under review by Health Canada. The company expects to complete the conversion ofQ1 this quarter and, subject to the receipt of cultivation and sales licenses from Health Canada, begin selling driedcannabis.

Source: Company reports.

The company expects all four quadrants of Delta 3 tostart commercial production in Q4/FY19, and be ableto reach an annual production rate of 75,000 kg in2020. Management estimates that the greenhousewould be a more efficient use for cannabis cultivation,potentially generating revenue 10-15x that of currentproduce, with an EBITDA margin >50%.

Cannabis Competitive Advantage


With a dedicated focus to greenhouse growing, Village Farms has built deep agricultural experience (a

combined 750 years from multiple growing regions around the world), and has become an expert in agricultural

safety, holding biological control/pesticide registrations, adopting Good Agricultural Practices (GAP), and

undergoing comprehensive food safety audits by Primus Labs. Management sees cannabis no different than

any other agricultural product, although it will have its own unique ramp up challenges to master.

There has been little turnover at the company. The team has largely been cultivating with established

management and labour forces through the course of its 30 years of operating history. This, coupled with the

point above, means that the company should be time-efficient in launching its cannabis business.

Village Farms has advanced proprietary technological expertise for greenhouse crop-growing, with its Applied

Research Division continuously developing improvements for its production technology to stay at the forefront of

the industry. Greenhouse systems provide control to achieve the best desired agricultural climate, including the

ability to efficiently harness all available natural sunlight, resulting in lower energy needs and therefore lower cost

of production. That said, part of the retrofitting of D3 will be to add supplemental lighting to boost yields

(tomatoes don’t have the margins to justify the capex, but marijuana does).

Besides the greenhouse facilities, Village Farms also has the infrastructure in place to begin selling cannabis to

sophisticated institutional wholesale buyers such as LCBO, Shoppers Drug Mart, etc. It has the IT systems, has

mastered the logistics of maintaining a regular and stable supply chain, and has the know-how to deal with

potentially temperamental clients.

It’s worth noting that it costs less to convert a greenhouse (C$55MM for 1.1MM sq. ft. or ~C$50/sq. ft.) than to

build one from scratch (rule of thumb is C$~150/sq. ft.). Additionally, the large scale of operations provides

Village Farms with cost efficiencies from economies of scale.

Existing Greenhouse Facilities – D3, D2, D1



Pictures Of Facilities & Produce



Pictures Of The Delta Greenhouses –

December 2017


Source: Beacon Securities.

Model Highlights – Pure Sunfarms



Pure Sunfarms

(000's) Dec-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Dec-20 Dec-21

Q4/FY17 FY17 Q1/FY18 Q2/FY18 Q3/FY18 Q4/FY18 FY18 Q1/FY19 Q2/FY19 Q3/FY19 Q4/FY19 FY19 Q1/FY20 Q2/FY20 Q3/FY20 Q4/FY20 FY20 FY21

Revenue Drivers

Production Sold (kg)

From D3 - Q1 0 0 0 0 1,219 1,625 2,844 0 0 1,625 2,031 3,656 2,438 2,844 3,250 3,656 12,188 16,250

From D3 - Q2 0 0 0 0 0 0 0 1,625 2,031 2,438 2,844 8,938 3,250 3,656 4,063 4,063 15,031 16,250

From D3 - Q3 0 0 0 0 0 0 0 0 0 1,625 2,031 3,656 2,438 2,844 3,250 3,656 12,188 16,250

From D3 - Q4 0 0 0 0 0 0 0 0 0 0 0 0 813 1,625 2,438 3,250 8,125 16,250

kg and kg equivalents sold 0 0 0 0 1,219 1,625 2,844 1,625 2,031 5,688 6,906 16,250 8,938 10,969 13,000 14,625 47,531 65,000

Realized Price ($/g) C$0.00 C$0.00 C$0.00 C$0.00 C$5.00 C$4.75 C$4.86 C$4.75 C$4.50 C$4.25 C$4.00 C$4.23 C$4.00 C$4.00 C$4.00 C$4.00 C$4.00 C$4.00

Total Revenue C$0 C$0 C$0 C$0 C$6,094 C$7,719 C$13,813 C$7,719 C$9,141 C$24,172 C$27,625 C$68,656 C$35,750 C$43,875 C$52,000 C$58,500 C$190,125 C$260,000

Variable Costs

COGS/g C$0.00 C$0.00 C$0.00 C$0.00 C$2.00 C$1.90 C$1.94 C$1.80 C$1.70 C$1.60 C$1.50 C$1.59 C$1.40 C$1.30 C$1.20 C$1.10 C$1.23 C$1.00

Total COGS C$0 C$0 C$0 C$0 C$2,438 C$3,088 C$5,525 C$2,925 C$3,453 C$9,100 C$10,359 C$25,838 C$12,513 C$14,259 C$15,600 C$16,088 C$58,459 C$65,000

Gross Margin C$0 C$0 C$0 C$0 C$3,656 C$4,631 C$8,288 C$4,794 C$5,688 C$15,072 C$17,266 C$42,819 C$23,238 C$29,616 C$36,400 C$42,413 C$131,666 C$195,000

Overhead Expenses C$750 C$1,300 C$1,000 C$1,250 C$2,500 C$2,750 C$7,500 C$3,000 C$3,250 C$7,735 C$7,735 C$21,720 C$8,580 C$8,775 C$8,840 C$9,360 C$35,555 C$39,000

Pretax Income -C$750 -C$1,300 -C$1,000 -C$1,250 C$1,156 C$1,881 C$788 C$1,794 C$2,438 C$7,337 C$9,531 C$21,099 C$14,658 C$20,841 C$27,560 C$33,053 C$96,111 C$156,000

Taxes C$0 C$0 C$0 C$0 C$301 C$489 C$790 C$466 C$634 C$1,908 C$2,478 C$5,486 C$3,811 C$5,419 C$7,166 C$8,594 C$24,989 C$40,560

Net Income (C$) -C$750 -C$1,300 -C$1,000 -C$1,250 C$856 C$1,392 -C$2 C$1,327 C$1,804 C$5,429 C$7,053 C$15,613 C$10,847 C$15,422 C$20,394 C$24,459 C$71,122 C$115,440

US$ To C$ $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25 $1.25

Net Income (US$) -US$600 -US$1,040 -US$800 -US$1,000 US$685 US$1,114 -US$2 US$1,062 US$1,443 US$4,343 US$5,642 US$12,490 US$8,677 US$12,338 US$16,316 US$19,567 US$56,897 US$92,352

Village Farms' Share -US$300 -US$520 -US$400 -US$500 US$342 US$557 -US$1 US$531 US$722 US$2,172 US$2,821 US$6,245 US$4,339 US$6,169 US$8,158 US$9,784 US$28,449 US$46,176

Capex C$5,000 C$5,000 C$15,000 C$1,000 C$7,000 C$3,000 C$26,000 C$4,000 C$5,000 C$10,000 C$5,000 C$24,000 C$250 C$250 C$250 C$250 C$1,000 C$1,000

Cash C$13,700 C$13,700 C$25,700 C$23,450 C$17,306 C$15,698 C$15,698 C$13,025 C$9,829 C$5,258 C$7,311 C$7,311 C$17,907 C$33,079 C$53,224 C$77,433 C$77,433 C$191,873

Total Net Assets C$39,782 C$39,782 C$66,782 C$65,532 C$66,388 C$67,780 C$67,780 C$69,107 C$70,911 C$76,340 C$83,393 C$83,393 C$94,239 C$109,661 C$130,056 C$154,515 C$154,515 C$269,955

Total Net Assets - Village Farms' Share C$19,891 C$19,891 C$33,391 C$32,766 C$33,194 C$33,890 C$33,890 C$34,554 C$35,455 C$38,170 C$41,696 C$41,696 C$47,120 C$54,831 C$65,028 C$77,257 C$77,257 C$134,977

Key Operational Data

kg sold - Y/Y % Change - - - - - - - - - 367% 325% 471% 450% 440% 129% 112% 193% 37%

Revenue - Y/Y % Change - - - - - - - - - 297% 258% 397% 363% 380% 115% 112% 177% 37%

Gross Margin % - - - - 60% 60% 60% 62% 62% 62% 63% 62% 65% 68% 70% 73% 69% 75%

Model Highlights – Village Farms



Village Farms

(000's) Dec-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Dec-20 Dec-21

Q4/FY17 FY17 Q1/FY18 Q2/FY18 Q3/FY18 Q4/FY18 FY18 Q1/FY19 Q2/FY19 Q3/FY19 Q4/FY19 FY19 Q1/FY20 Q2/FY20 Q3/FY20 Q4/FY20 FY20 FY21

Consolidated Revenue US$32,391 US$153,933 US$28,198 US$41,024 US$40,310 US$34,116 US$143,648 US$28,198 US$41,024 US$40,310 US$34,116 US$143,648 US$28,198 US$41,024 US$40,310 US$34,116 US$143,648 US$143,648

Total COGS US$28,702 US$141,227 US$24,552 US$38,487 US$38,212 US$28,702 US$129,953 US$24,552 US$38,487 US$38,212 US$28,702 US$129,953 US$24,552 US$38,487 US$38,212 US$28,702 US$129,953 US$129,953

Gross Margin US$3,689 US$12,706 US$3,646 US$2,537 US$2,098 US$5,414 US$13,696 US$3,646 US$2,537 US$2,098 US$5,414 US$13,696 US$3,646 US$2,537 US$2,098 US$5,414 US$13,696 US$13,696

Total Operating Expenses US$3,574 US$14,826 US$2,964 US$3,547 US$3,098 US$3,574 US$13,182 US$2,964 US$3,547 US$3,098 US$3,574 US$13,182 US$2,964 US$3,547 US$3,098 US$3,574 US$13,182 US$13,182

Income From Operations US$115 -US$2,120 US$683 -US$1,010 -US$1,000 US$1,840 US$514 US$683 -US$1,010 -US$1,000 US$1,840 US$514 US$683 -US$1,010 -US$1,000 US$1,840 US$514 US$514

Other Expenses (Income)

Interest Expense US$667 US$2,683 US$609 US$609 US$600 US$590 US$2,408 US$580 US$570 US$560 US$551 US$2,261 US$541 US$531 US$521 US$511 US$2,104 US$1,948

Foreign Exchange Loss (Gain) US$0 -US$57 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0

Other Expense (Income) US$0 -US$96 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0

Share Of Loss (Gain) From Joint Venture US$300 US$520 US$400 US$500 -US$342 -US$557 US$1 -US$531 -US$722 -US$2,172 -US$2,821 -US$6,245 -US$4,339 -US$6,169 -US$8,158 -US$9,784 -US$28,449 -US$46,176

Loss (Gain) On Disposal Of Assets US$0 -US$8,564 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0 US$0

Pretax Income (Loss) -US$852 US$3,394 -US$326 -US$2,119 -US$1,257 US$1,807 -US$1,895 US$634 -US$858 US$612 US$4,111 US$4,498 US$4,481 US$4,628 US$6,637 US$11,112 US$26,858 US$44,742

Recovery (Payment) Of Income Taxes -US$143 -US$326 US$19 -US$421 -US$416 US$325 -US$492 US$27 -US$411 -US$406 US$335 -US$454 US$37 -US$401 -US$395 US$346 -US$414 -US$373

Net Income -US$708 US$3,721 -US$346 -US$1,698 -US$841 US$1,482 -US$1,403 US$607 -US$448 US$1,017 US$3,775 US$4,952 US$4,444 US$5,029 US$7,032 US$10,767 US$27,272 US$45,115

EPS - Fully Diluted -US$0.02 US$0.09 -US$0.01 -US$0.04 -US$0.02 US$0.03 -US$0.03 US$0.01 -US$0.01 US$0.02 US$0.09 US$0.11 US$0.10 US$0.12 US$0.16 US$0.25 US$0.62 US$1.03

EBITDA (Ex-Pure Sunfarms Share) US$1,877 US$6,868 US$2,420 US$727 US$737 US$3,577 US$7,462 US$2,420 US$727 US$737 US$3,577 US$7,462 US$2,420 US$727 US$737 US$3,577 US$7,462 US$7,462

EBITDA (With Pure Sunfarms Share) US$1,577 US$6,348 US$2,020 US$227 US$1,080 US$4,134 US$7,461 US$2,951 US$1,449 US$2,909 US$6,398 US$13,707 US$6,759 US$6,896 US$8,895 US$13,361 US$35,911 US$53,638

Key Operational Data

Revenue - Y/Y % Change -13% -1% -10% -10% -10% 5% -7% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Gross Margin % Consolidated 11% 8% 13% 6% 5% 16% 10% 13% 6% 5% 16% 10% 13% 6% 5% 16% 10% 10%

EBITDA Margin % (Ex-Pure Sunfarms) 6% 4% 9% 2% 2% 10% 5% 9% 2% 2% 10% 5% 9% 2% 2% 10% 5% 5%

EBITDA Margin % (With Pure Sunfarms) 5% 4% 7% 1% 3% 12% 5% 10% 4% 7% 19% 10% 24% 17% 22% 39% 25% 37%

Derivation Of Target Price


We use a sum of the parts approach in determining our target price for Village Farms.

First, we use a DCF for the company’s investment in Pure Sunfarms. Highlights from our DCF include: achieving

9% market share by FY21 (based on the PBO’s midpoint estimate of 734 mt); revenue realized per gram

stabilizing at C$4 in Q4/FY19 and beyond; all-in costs of goods sold falling to reach C$1/g in Q1/FY21 and

beyond; a discount rate of 12%; and a 0% terminal growth rate post FY21. Incorporating our estimate of net

cash as at the valuation date (C$16MM at the end of 2018) this approach results in a total value of C$792MM or

C$396MM for Village Farms’ share – or approximately C$9.00 per fully diluted Village Farms share.


(000's) Dec-19 Dec-20 Dec-21

FY19 FY20 FY21 Terminal Value

Production Sold (kg) 16,250 47,531 65,000

Revenue C$68,656 C$190,125 C$260,000

Adjusted Gross Margin C$42,819 C$131,666 C$195,000

Overhead Expenses C$21,720 C$35,555 C$39,000

Net Income C$15,613 C$71,122 C$115,440

Capex C$24,000 C$1,000 C$1,000

Free Cash Flow -C$8,387 C$70,122 C$114,440 C$953,667

PV of Free Cash Flow -C$7,984 C$57,817 C$85,035 C$641,407

Price Realized / g C$4.23 C$4.00 C$4.00

COGS / g (all in) C$1.59 C$1.23 C$1.00

Per DCF

Discount Rate 12%

Total PV of FCF C$776,275

Net Cash (Debt) as at Valuation Date (Q4/FY18) C$15,698

Total Value C$791,973

Village Farms' Share C$395,986

Derivation Of Target Price (Contd)


We then value Village Farms’ produce business by applying an EV/EBITDA multiple of 13.0x on EBITDA estimate

for the 12 months ended December 2018 (US$7.5MM). This yields a value of C$121MM. We note that the

company’s shares traded at an EV/Trailing EBITDA multiple of 12.4x on June 6, 2017, just prior to the

announcement that it was entering the cannabis sector.

Adding these two components yields a forecast EV of C$517MM. Deducting C$34MM (our net debt forecast as

at Q4/FY18) results in a forecast equity value of C$483MM. After adjusting for in the money options and

warrants, we arrive at a target price of C$11.00 (rounded).


(000's)

Pure Sunfarms

Value Of Pure Sunfarms JV C$791,973

Village Farms' Share C$395,986

Produce Business

EBITDA (12 months ending December 2018) US$7,462

Multiple 13.0x

Value of produce business (US$) US$97,003

US$ to C$ $1.25

Value of produce business (C$) C$121,254

Total Enterprise Value C$517,241

Less forecast net debt (December 2018) C$33,695 Adjustments Fully Diluted

Forecast equity value C$483,545 C$3,624 C$487,169

Shares o/s (December 2018) 42,744 2,541 45,285

Target price (rounded) C$11.00

Current price C$7.67

Implied return 43%

Potential Catalysts


Licensing Approval From Health Canada. As shown on slide 17, Village Farms trades at a discount to its peers.

We believe much of this is due to the fact that it is currently unlicensed. To comply with the ACMPR, Emerald, on

behalf of Pure Sunfarms, has filed the license application with Health Canada. The application has been

accepted and is currently under review. We believe that obtaining a cultivation license would make the future

cash flows more ‘real’ in the eyes of investors, pushing share prices higher. When the conversion of D3 is fully

complete, Pure Sunfarms would be one of the largest commercial cannabis producers in Canada.

Increasing Awareness Amongst Investors. Village Farms has largely been under the Street’s radar. Until less than

a month ago, the company had no analyst coverage. We suspect that it will continue to increasingly catch the

attention of institutional investors, which could result in an increase in the share price.

Increase In Capacity Deployed. Pure Sunfarms has options to acquire the conveniently located Delta 2 and

Delta 1 greenhouses – a total of 3.7MM more sq. ft. (85 acres). The additional annual yield from these facilities is

estimated at 225,000 kg or 3x D3. We believe that if/when these options are exercised, Village Farms’ valuation

would see a significant jump. Recall that the primary use of proceeds from Village Farms’ recent C$13.5MM

financing was to be able to deliver D2 unencumbered to Pure Sunfarms – should it exercise its right to acquire it.

Amendments To ‘Fix’ NAFTA. Mexican competition has hurt the company’s produce business. There are

ongoing negotiations between member states currently. Any changes which ‘fix’ the trade agreement, levelling

the playing field versus Mexican competition which benefits from much lower labour costs, could result in

improved margins in the company’s produce business and an increase in Village Farms’ share price.

“Blue Sky” Run Rate & Valuation


Our official model only incorporates the conversion of the Delta 3 facility (1.1MM sq. ft. (25 acres)) for the

cultivation and sale of cannabis. Additionally, we ran potential scenarios for the conversion of Delta 2 (1.1MM

sq. ft. (25 acres)) and Delta 1 (2.6MM sq. ft. (60 acres)).

Should Pure Sunfarms exercise its options to acquire D2 and then D1, our ‘blue sky’ analysis suggests Village

Farms’ shares could reach C$16.50 and C$26.00, respectively.


(000's) Scenarios

Actual Model

(Only D3) Adds D2

Adds D2

& D1

Pure Sunfarms

Steady State Production (kg) 65,000 130,000 290,000

Year Of Steady State Production 2021 2022 2022

Revenue / g C$4.00 C$3.75 C$3.50

Revenue C$260,000 C$487,500 C$1,015,000

Cost / g C$1.00 C$1.00 C$1.00

Net Income C$115,440 C$168,350 C$423,835

Total Conversion Capex C$55,000 C$110,000 C$242,000

DCF Value Of Pure Sunfarms C$791,973 C$1,415,911 C$2,743,099

Village Farms' Share C$395,986 C$707,956 C$1,371,549

Village Farms

Share Of Value Of Pure Sunfarms C$395,986 C$707,956 C$1,371,549

Value Of Produce Business C$121,254 C$109,129 C$84,878

Total Enterprise Value C$517,241 C$817,085 C$1,456,427

Less Forecast Net Debt C$33,695 C$34,695 C$36,695

Add In The Money Options/Warrants C$3,624 C$3,624 C$1,419,732

Equity Value, Fully Diluted C$487,169 C$786,013 C$1,423,356

Fully Diluted Shares Outstanding 45,285 48,202 55,146

Implied Value Per Share (Rounded) C$11.00 C$16.50 C$26.00

Appendices

Medical Marijuana – Sizeable In Itself


During the quarter ended Sept 30, 2017, LPs sold 13,574 kg of marijuana to patients – up 89% y/y and 12%

sequentially. As at Sept 30, 2017, there were 235,621 patients registered, up 139% y/y and 17% sequentially.

Our calculations peg the size of the medical cannabis industry at C$452MM today, however forecasts call for the

industry to reach C$~1.3B over the coming years.

We note that the main driver of the industry’s growth over the past few quarters has been marijuana oil. We

believe this favours low cost greenhouse growers like Village Farms, which may not be growing a ‘connoisseur bud’,

but will be well suited for extraction.

Source: Health Canada, Beacon Securities.

Canadian Medical Marijuana Industry: Historical Growth (left); Forecast (right)

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2015 2016 2017 2018 2019 2020

Industry Size % Growth

Legal Recreational Market Likely To Dwarf

The Medical Market


April 13, 2017 was a landmark day in the industry, with the federal government introducing legislation legalizing

recreational marijuana. Canadians over the age of 18 (could be higher in certain provinces) will be allowed to

possess up to 30 g of marijuana starting this summer.

Looking at the actual results from other states where recreational marijuana has been legal for some time, as

well as extrapolating the four MOUs from the Government of New Brunswick, projections for the potential size of

a legal market in Canada are much larger.

The following table summarizes the forecasted retail sales potential in the Canadian recreational market post-legalization.

Rationale Year

PBO midpoint estimates, Nov 2016 2018 655,000 kg C$4.9B

PBO midpoint estimates, Nov 2016 2021 734,000 kg C$4.9B

NB MOUs midpoint estimates, Nov 2017 2018 748,992 kg C$7.7B

Government of Canada estimate, late 2017 2017 C$7B - C$8B

Washington state TTM sales extrapolation, Oct 2017 2018 C$11.2B

Washington state TTM sales extrapolation, Apr 2017 2018 509,760 kg

Colorado TTM sales extrapolation, Oct 2017 2018 C$12.1B

MPG estimates, Dec 2017 2018 900,000 kg

Market Size

Source: Parliamentary Budget Officer, state/provincial/federal governments, Marijuana Business Daily, Beacon Securities.

Comparables


Note: VFF and FIRE estimates are Beacon Securities’. Estimates for all other companies are consensus. VFF’s sales and EBITDA are in US$, all other figures in C$. EBITDA for VFF includes share of net income from Pure Sunfarms JV.Source: Company reports, Thomson Reuters, Beacon Securities estimates.

Marijuana Comparables

Year

End

Village Farms International Inc VFF.TO DEC $7.67 $323 -$40 $362 1.9x 2.0x 2.0x 2.0x 2.0x 45.7x 38.9x 21.2x 8.1x 3.0x

Other Public Companies

Canopy Growth Corp WEED.TO MAR $37.61 $7,092 $520 $6,572 RESTRICTED

Aurora Cannabis Inc ACB.TO JUN $12.32 $5,544 $340 $5,204 261.1x 73.7x 18.9x 11.5x 7.1x - 269.7x 47.9x 25.4x 20.7x

Aphria Inc APH.TO MAY $22.05 $3,973 $331 $3,642 180.8x 85.0x 17.2x 6.5x 4.7x 856.9x 310.4x 48.7x 19.1x 18.6x

MedReleaf Corp LEAF.TO MAR $24.37 $2,454 $124 $2,330 57.7x 50.2x 15.5x 8.3x 7.0x 208.8x 337.7x 45.6x 21.7x 16.5x

Cronos Group Inc MJN.V DEC $10.40 $1,593 $68 $1,524 RESTRICTED

CannTrust Holdings Inc TRST.CD DEC $11.00 $1,000 $27 $973 46.9x 13.5x 6.1x 8.2x - - 46.8x 16.1x 14.8x -

CanniMed Therapeutics Inc CMED.TO OCT $27.82 $680 $40 $639 37.5x 16.7x 8.0x 6.1x - - 76.2x 19.7x 11.7x -

OrganiGram Holdings Inc OGI.V AUG $4.94 $577 $95 $482 63.6x 17.1x 4.9x 3.5x 2.4x - 88.9x 14.4x 9.5x 7.5x

The Hydropothecary Corp THCX.V JUL $4.40 $542 $103 $439 RESTRICTED

Supreme Cannabis Company Inc FIRE.V JUN $2.65 $500 $39 $461 1003.1x 53.0x 5.9x 2.9x 2.4x - - 15.6x 5.9x 4.5x

Group Average $2,396 $169 $2,227 235.8x 44.2x 10.9x 6.7x 4.7x 532.8x 188.3x 29.7x 15.5x 13.6x

EV/EBITDAEV/Sales

2019E 2020E 2021E2017E 2017E2021E 2018E2020E2018E 2019EEV

(MM) Company Ticker

Last

Price

Market

Cap.

(MM)

Net

Cash

(MM)

Marijuana Comparables

Village Farms International Inc US$153.9 US$143.6 US$143.6 US$143.6 US$143.6 US$6.3 US$7.5 US$13.7 US$35.9 US$53.6 4.1% 5.2% 9.5% 25.0% 37.3%

Other Public Companies

Canopy Growth Corp RESTRICTED

Aurora Cannabis Inc $19.9 $70.6 $275.7 $451.3 $733.5 -$3.8 $19.3 $108.6 $204.6 $251.4 - 27.3% 39.4% 45.3% 34.3%

Aphria Inc $20.1 $42.9 $211.3 $563.4 $777.7 $4.3 $11.7 $74.9 $190.5 $195.4 21.1% 27.4% 35.4% 33.8% 25.1%

MedReleaf Corp $40.4 $46.4 $150.3 $282.3 $331.2 $11.2 $6.9 $51.1 $107.4 $140.8 27.6% 14.9% 34.0% 38.1% 42.5%

Cronos Group Inc RESTRICTED

CannTrust Holdings Inc $20.8 $72.0 $158.8 $118.3 - -$0.3 $20.8 $60.6 $65.7 - - 28.8% 38.1% 55.5% -

CanniMed Therapeutics Inc $17.1 $38.3 $80.0 $104.0 - -$0.4 $8.4 $32.5 $54.7 - - 21.9% 40.6% 52.6% -

OrganiGram Holdings Inc $7.6 $28.2 $97.7 $139.5 $198.0 -$6.4 $5.4 $33.5 $50.7 $64.6 - 19.2% 34.2% 36.3% 32.6%

The Hydropothecary Corp RESTRICTED

Supreme Cannabis Company Inc $0.5 $8.7 $78.1 $160.9 $191.9 -$5.4 -$6.1 $29.6 $77.5 $101.5 - - 37.9% 48.2% 52.9%

Group Average 24% 23% 37% 44% 37%

2020E Company 2017E 2018E 2019E 2021E 2021E2017E 2017E 2018E 2019E 2020E2018E 2019E 2020E 2021E

Sales (MM) EBITDA (MM) EBITDA Margin %

18

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As at December 31, 2017 #Stocks Distribution

BUY 69 75.0% Buy Total 12-month return expected to be > 15%

Speculative Buy 13 14.1% Speculative Buy Potential 12-month return is high (>15%) but given elevated risk, investment could result in a material loss

Hold 9 9.8% Hold Total 12-month return is expected to be between 0% and 15%

Sell 0 0.0% Sell Total 12-month return is expected to be negative

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