Village Farms or Emerald Health: Which is the better value?

Imagine for a moment that someone gifted you with $100,000 with only one stipulation: you must buy either Village Farms (VFF) or Emerald Health Therapeutics (EMHTF). Here are a few tidbits of info to help you out with this hypothetical scenario.

Before today’s stock market opening, Village Farms made a super positive announcement regarding Pure Sunfarms, their 50/50 joint venture with Emerald Health. The annual production capacity is being doubled to 150,000 kilos.

At the time of this writing, shares of VFF had risen almost 7 percent, while Emerald is virtually unchanged after opening the day lower. Even still, here is why my choice would be Emerald Health Therapeutics.

The rap sheet

VFF has about $150 million in sales versus Emerald at just under $1 million. Both companies have an equal interest in a joint venture called Pure Sunfarms. On April 1st, it was announced that Pure Sunfarms would double its production to 2.2 million square feet and 150,000 kgs of medical and recreational cannabis. In making the announcement, VFF claimed that in short order, Pure Sunfarms would become the industry leader in cannabis production.

To begin, the market cap of VFF at nearly $700 million is 60 percent higher than Emerald. It’s true, VFF does have significant revenues for a cannabis company. The trouble is, VFF is not a cannabis company per se. Village Farms produces and distributes greenhouse-grown tomatoes, bell peppers, and cucumbers in North America. The company also owns and operates a 7.0-megawatt power plant that generates and sells electricity to British Columbia Hydro and Power Authority.  

For the last two years, VFF has operated this business at a loss. So what is that worth? Not much, considering the time and cash flow it requires. There are no publicly traded companies to compare, but with little or no growth prospects, my guess is not more than the $100 million net book value.

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Victoria BC based Emerald, with its $439 million market cap, has practically no revenues. But it does have a book value of $128 million plus. In the world of THC and CBD, book value doesn’t mean much. Nevertheless, it is interesting to keep in mind.

Brand marketing advantage to Emerald

The Village Farm brand is pretty well established in North American supermarkets when it comes to tomatoes, cucumbers, and peppers. However, there is virtually no positive transfer of brand value to cannabis.

Compare this to the multiple numbers of brands that include Emerald, CBD Oil, Time Warp, Hash Plant, Island Pink, Shishkeberry, and Sensi Star—the advantage clearly goes to EMHTF.

How valuable are these brands? It is one thing to create a cool sounding name and something else to get consumer recognition and repeat sales, but it gives Emerald a particular benefit.

Pure Sunfarms joint venture

Anywhere tomatoes can grow, cannabis can be cultivated, although most modern cannabis production in Canada is done in controlled climate facilities. So last July, Village Farms teamed up with Emerald to form a 50/50 joint venture, Pure Sunfarms. The JV combined the production and distribution skills of VFF with the branding and marketing of Emerald.

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By early 2018, Pure Sunfarm production was licensed to expand to 1,100,000 square feet, enough to produce 75,000 kilos of cannabis annually. From the beginning, the JV has had options to expand to another two greenhouses; combined, they would produce 300 metric tons per year, equal to roughly half of Canada's entire recreational cannabis consumption at the time nationwide legalization commenced in October 2018.

So with its April 1st announcement that Pure Sunfarms would double its production to 2.2 million square feet and 150,000 kgs of medical and recreational cannabis, the stock shot up as much as 8 percent higher in the first few hours of trading. By contrast, Emerald opened lower and has not traded up by more than a 2 percent margin so far today. How does this make sense?

Many reasons affect investor psychology. I hate basing any opinions on chat room chatter. In the case of Emerald, for what little it is worth, there are no vicious investors or scandalous acquisitions to be found.

Fantasy figures

So the question remains: who benefits most from the Pure Sunfarms joint venture? Since it is a 50/50 joint venture, it is easy to assume both companies benefit equally. This is where we think shareholders of Emerald could end up getting the better of the deal.

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If you allow some fantasy figures, it is easier to understand. It starts with the potential of Pure Sunfarm production. Assuming that annual production reached 150,000 kilos within the next 24 months and that operating profits of $2 per gram are realized, that translates into EBIT of $350 million. Emerald would be entitled to $175 million. Then allowing for non-operating costs, each company could net out around $135-$140 million.

Closing arguments

Our example is far from perfect, but I feel comfortable applying it equally to both partners in the JV.  For VFF and its 47.6 million outstanding shares, it means about $2.85 in annual per share or just a little more than 5.3 times based on the recent price of $15. This indeed is cheap and helps explain in part why the stock has enjoyed a 53 percent move so far this year.

Emerald stats are even more impressive. Their share of Pure Sunfarms works out to $1.00 for each of the 139 million shares outstanding. That is a mere 3.4 times the recent $3.20 per share price. For the record, when comparing price to book value, VFF comes in at 7.1 times, whereas Emerald is only 3.36. Now if I could only find someone to offer me $100,000 to invest.

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