Village Farms announced this week that Pure Sunfarms (PSF) is now 100% Village Farms (Ticker: VFF).

Village Farms is purchasing the remaining stake it does not own in cannabis grower Pure Sunfarms from partner Emerald Health Therapeutics.

Now that Village Farms owns 100% of the lowest cost cannabis greenhouse in Canada, should investors think about buying into Village Farms for the long term?

Pure Sunfarms Did Not Come Cheap

First we need to understand if Village Farms got a deal on the remaining piece of PSF.


Based on the C$80 million purchase price for the remaining 41.3%, Village Farms is valuing PSF at C$200 million.

This equates to 4x sales and 20x trailing EBITDA (last quarter x 4).

Looking at where other cannabis companies trade, PSF was purchased for a premium so there was no free value given away in this deal.

We can assume Village Farms had to pay a premium to give Emerald Health, the owner of the 41.3% a reason to sell.

So while Pure Sunfarms was purchased for a premium, it is not generating premium profits.

Last quarter’s EBITDA margin of 20% is best in class in Canada, but was down from 78% in 2019 and also far below U.S. operators in the 50%-70% range.

With a price war continuing in Canada we wouldn’t be surprised if PSF’s margins fall even further, making the premium price hard to swallow.

PSF Was Bought at a Premium Multiple to Where Other Stocks Trade

Source: http://www.ycharts.com

VFF Loves Pure Sunfarms, But Should You?

It’s clear to us why Village Farms was willing to pay a premium to become the one and only owner of PSF.

Growing costs.

Pure Sunfarms grew cannabis for only $0.80/gram all-in over the last year when it was growing wholesale flower, making it the cheapest greenhouse grower in Canada.

Pure Sunfarms is pivoting to recreational products from almost exclusively wholesale which brings higher costs but compared to Aphria at $1.69/gram and Aurora who hasn’t even been disclosing their all-in costs lately, PSF is still the low-cost king.

But there are other predators in the waters and they smell blood.

Though PSF may be the cheapest “greenhouse” grower it is not the cheapest grower.

Outdoor cannabis has an all-in cost of only $0.15/gram and will come down below $0.10/sh as the industry matures.

The outdoor harvest is right around the corner and we worry PSF could lose the low-cost leader crown by year-end.

We are already seeing the industry split into two parts, premium and discount.

If the discount segment ends up being supplied by outdoor and the premium segment by small-batch indoor greenhouses, then where does that leave mid-quality greenhouses like Pure Sunfarms?

Pure Sunfarms is a little like the world’s fastest propeller plane 6 months after the invention of the jet engine.

Being the best of the worst still puts you far behind the leader and in a fast-changing cannabis market, if you aren’t first you’re last.

 

Full Disclosure: The author has no positions in any of the stocks mentioned in this report.

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