Village Farms International, Inc. (VFF-T)

Transcription

1 Village Farms International, Inc. (VFF-T) It Takes A Village To Raise A Crop January 18, 2018 Vahan Ajamian, CPA, CA, CFA Analyst - (416) vajamian@beaconsecurities.ca We are initiating coverage of Village Farms with a Buy rating and a target price of C$ In summary, our recommendation is based on the following: While Canada s medical marijuana market is sizeable, we expect it to be dwarfed by the recreational market, which we believe could reach C$7B to C$11B over time. Dozens of companies have raised vast amounts of capital to build facilities aiming to profit from this potential. Many of these firms have never grown at scale. Village Farms is one of the largest providers of premium produce in North America. Primarily growing tomatoes in its greenhouses in Delta, BC and in Texas, the company currently generates revenue of US$~155MM annually. Largely driven by Mexican competition, the company has seen its EBITDA margins suffer over the past decade, from ~10% to ~5% currently. On June 6, 2017, Village Farms announced that it was entering the cannabis market via a JV with Emerald Health Therapeutics Inc. (EMH-V, not covered) to convert a 1.1MM sq. ft. greenhouse from growing tomatoes to cannabis with an option to convert another 3.7MM sq. ft. behind it. This immediately made the company one of the larger players in the sector. The company s approach has subsequently been validated by other leaders in the sector. We expect that all companies will undergo a period of ramping up (including Village Farms transitioning to cannabis). However, we believe execution risk is lower for Village Farms than for most of its peers as: its master grower team has 750 years of experience growing a variety of crops including in this greenhouse specifically; it has proven an ability to grow at scale, at a low cost, and sell to large complex organizations (Costco, Walmart, Loblaws etc.); and it can leverage Emerald s cannabis strains/expertise. Should cannabis pricing ultimately commoditize, we believe Village Farms will be among the best positioned by running a low cost operation. Having been a largely under-known name in the past, the word is clearly getting out. The company just recently received analyst coverage, trading volumes have jumped lately despite the increase in price, and a large previously hostile block was just cleaned up. That said, with a market cap of just C$323MM, Village Farms pales in comparison to its peers. It has a tight share structure with high insider and institutional ownership. Even after applying what we consider to be very conservative forecasts, we see compelling value at current levels and we believe licensing could be imminent and act as a catalyst to its share price. Previous Close 12-month Target Price Potential Return 52 Week Price Range Initiating Coverage BUY C$11.00 C$7.67 C$ % C$ C$9.80 YE: Dec 31 FY17E FY18E FY19E Revenue ($MM) US$153.9 US$143.6 US$143.6 EBITDA ($MM) US$6.3 US$7.5 US$13.7 FD EPS ($) US$0.09 (US$0.03) US$0.11 FY17E FY18E FY19E EV/Sales 1.9x 2.0x 2.0x EV/EBITDA 45.7x 38.9x 21.2x P/E 65.8x nmf 53.9x Shares Outstanding Market Cap Basic 42.0 FD 45.3 Basic FD Net Debt (Cash) Enterprise Value C$322.5 C$347.3 C$39.9 C$362.4 Estimates Valuation Stock Data (MM) About the Company Village Farms owns and operates agricultural greenhouse facilities in the U.S. and Canada. It currently produces, markets, and sells tomatoes, bell peppers, and cucumbers across North America. On June 6, 2017, the company announced its entry into the cannabis market via a JV (Pure Sunfarms) with Emerald Health Therapeutics Inc. (EMH-V, not covered). Note: EBITDA includes share of Pure Sunfarms' net income. All figures in US$ unless otherwise indicated. Stock Performance Beacon Securities Ltd. 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H

2 Table of Contents Investment Thesis... 3 Industry Overview A Massive Industry Finally About To Go Legit... 6 Company Overview Cannabis at Village Farms: Value Proposition Revenue Model and Forecast Pure Sunfarms The Main Driver Of Value Creation Village Farms Steady Eddie Operation Supplemented By Cannabis Competitive Landscape Valuation: What s It Worth? Potential Catalysts Potential Blue Sky Run Rate & Valuation Key Risks Initiating Coverage With A Buy Rating And A C$11.00 Target Price Appendix A: Consolidated Financials January 18, 2018 Page 2

3 Investment Thesis The Canadian medical marijuana market is already sizeable. The number of patients has increased from just under 8K in June 2014 to over 235K in Sept Our calculations peg the size of the industry at C$452MM today, however forecasts call for the industry to reach C$~1.3B over the coming years. 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. Most indications are that a legal recreational marijuana market would dwarf the size of the medicinal market. Looking at a number of methods, we peg the size of the Canadian market in the range of 665,000 kg to 900,000 kg, or C$7B to C$12B. Companies across the industry have diluted shareholders raising billions in equity to build new facilities and capitalize on this upcoming market. The latest trend in the market is a transition from initial indoor facilities to large greenhouse expansions. Village Farms is a vertically integrated provider of premium produce across North America. The company produces tomatoes, cucumbers and peppers in facilities in BC and Texas, and has partner greenhouses in Ontario, BC and Mexico. LTM revenue from this business was US$159MM and it generated US$8.5MM in EBITDA. EBITDA margins have been declining over the past several years as a result of Mexican competition from 10% a decade ago to 5% today. After months of planning, meetings with Health Canada, and negotiations with a few LPs, Village Farms entered the market on June 6, 2017, announcing a 50/50 JV (later named Pure Sunfarms) with Emerald for large scale cannabis production. As an existing LP, Emerald provided an ability to fast track licensing as a second site (we estimate it saved Village Farms at least a year as opposed to going it alone), cannabis genetics and expertise, as well as C$20MM to retrofit one of Village Farms greenhouses Delta 3 (D3), at a massive 1.1MM sq. ft. Village Farms transferred the greenhouse to the JV and will be supplying much of the greenhouse staff and agricultural expertise. The superior economics of cannabis production (where firms do not have to face international competition) are expected to vastly improve the company s financial profile. Management has forecast being able to generate as much revenue from cannabis in one greenhouse (D3) as the rest of the company combined and at EBITDA margins as high as 50%. January 18, 2018 Page 3

4 The conversion of D3 for cannabis production is well underway (blackout curtains, vault, security measures etc.). Conversion of the first 250,000 sq. ft. quadrant of Delta 3 (Q1) is expected to be complete and licensed by Health Canada this quarter. The company anticipates obtaining its authorization to sell cannabis over the summer and beginning commercial production in Q1 prior to July 1, Emerald is currently propagating plants which can be moved to Pure Sunfarms and help speed up its sales authorization timeline. The remaining three quadrants of D3 will be converted and come online one at a time, with management projecting all of D3 being in full production starting in October 2019 and producing 75,000 kg in Our forecasts are more conservative, as we are modelling Pure Sunfarms to produce 47,531 kg in 2020 and reach a run rate of only 65,000 kg in We use a long-term price per gram of C$4 (steady state revenue at full production of C$260MM) and an all in cost per gram of C$1 (equal to management s target). Why We Like Village Farms: Management knows how to grow high quality production at scale and low cost. The industry is seeing many players announce large scale greenhouse expansions and applying substantial valuations to their shares. Some of these players have not yet sold a gram of production grown in a greenhouse. Accordingly, we suspect some will be hit with challenges in scaling production while also switching building types from indoor to greenhouse. While it will take Village Farms some time to adjust to the specifics of growing cannabis as well, we believe that its team, which has been growing a variety of crops together in the same facility for over a decade promises investors lower execution risk relative to peers especially since it can leverage Emerald s knowledge (Emerald was originally licensed by Health Canada almost four years 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 (D3). This rate is meaningfully lower than most of the company s peers are projecting. While we see compelling value in Village Farms shares even at a run rate of 65,000 kg for Pure Sunfarms, there is clearly the potential for the company to significantly surpass these figures. There is an underlying business that pays the bills. While the macro environment has been difficult due to Mexican competition (i.e., NAFTA), management has found a way to control costs and still has a business that generates positive free cash flow even after debt repayments. In what will be critical when selling cannabis to provincial organizations, this management 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 January 18, 2018 Page 4

5 delivery, logistics, IT integration, dealing with sometimes finnicky customers etc.). Good shareholder base & tight cap structure. Village Farms has only 42.0MM shares outstanding, and 44.6MM on a fully diluted basis. Insiders own 26% of the company. We believe institutional investors hold a much larger percentage of its shares than 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., the largest greenhouse in North America). The values at which these greenhouses would be acquired by the JV have already been set at undisclosed amounts, which we believe are higher than the C$20MM paid for D3. Critically, Village Farms can maintain its 50% share in the Pure Sunfarms 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, in our view the potential to one day convert its 5.7MM sq. ft. of greenhouses in Texas to cannabis represents a free call option for investors. Village Farms just recently received analyst coverage and we feel investors are still largely just getting to know this new cannabis story. The fact that Canopy Growth Corp. (WEED-T, Restricted) recently announced JVs to convert tomato greenhouses to marijuana in BC and in Quebec illustrates to us that Village Farms is blazing a winning trail. In the shortterm we believe a supply crunch may result in higher prices for producers. However, in the long-term, the industry may commoditize somewhat. In our view, having run lean, low cost operations growing at scale already best positions Village Farms to be one of the leaders over the longer-term. Even after applying meaningful discounts to management s guidance, our DCF projects Village Farms share of the Pure Sunfarms JV to be C$9/fully diluted share. Adding the value of the company s produce business, we arrive at our C$11.00 target price. 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. January 18, 2018 Page 5

6 Industry Overview A Massive Industry Finally About To Go Legit Current State of the Industry Medical Market Marijuana possession, production and trafficking are currently prohibited in Canada under the Controlled Drugs and Substances Act except where authorized by exemptions or regulations, such as those for medical marijuana. Possession of up to 30 g carries a possible fine of up to C$1,000 and up to six months in jail. Police reported nearly 60K marijuana offences in 2014, of which 22K resulted in charges. Medical marijuana has been available in Canada since 2001, although regulations have changed over time. Currently, patients with the support of their health care practitioner can register with one of the 86 LPs licensed by Health Canada. Orders are shipped by mail/courier. Health Canada does not play a role in setting/regulating the price LPs charge for medical marijuana. Storefront dispensaries are currently illegal. Under the ACMPR authorized patients may also produce a limited amount of marijuana for their own medical purposes or designate someone else to produce it for them. As illustrated in Exhibit 1 the medical marijuana industry has been experiencing exponential growth in recent years. 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. Exhibit 1. Canada s Medical Marijuana Market: kg Sold & Patients Source: Health Canada. January 18, 2018 Page 6

7 According to the latest available data the average shipment of medical marijuana is for 0.75 g/day. Therefore, assuming all 236K patients were receiving this much marijuana, they would demand 64,501 kg annually today. Assuming an average retail price of C$7/g, medical marijuana is a C$452MM industry at the moment and rapidly growing. 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. Loblaws has announced that it will be covering medical marijuana under its employee benefit plan for prescriptions to treat spasticity and neuropathic pain associated with multiple sclerosis and nausea and vomiting in chemotherapy for cancer patients. Between Loblaws, Shoppers Drug Mart and George Weston, approximately 45,000 employees will be eligible (and presumably family members). This is the largest private sector company to offer the benefit to employees, and we believe it could be the start of a trend within Corporate Canada which could accelerate adoption further. Conclusion Medical marijuana in Canada is a sizeable industry in its own right and still in exponential growth mode. Path to Legalization On April 13, 2017 the Government of Canada introduced its much anticipated legislation for the legalization of recreational cannabis (Bill-C45) with a start date of no later than July 2018 (since amended to summer ). In our view, this should help de-risk the industry (and future cash flows) for investors. Highlights of the legislation include: allowing possession of up to 30 g for personal use or sharing among adults; keeping the medical marijuana system intact, subject to review at some point in the future; keeping licensing and import/export under federal jurisdiction; tougher restrictions and penalties for driving under the influence; provinces to oversee distribution with whatever model they deem fit, including imposing age restrictions above the federally mandated floor of 18 years; in provinces not ready by July 2018, users over the age of 18 will be allowed to purchase directly from LPs through the mail-order system. Edibles and concentrates will be legalized at most one year after recreational sales commence. Conclusion We are on the cusp of a once in a generation event the legalization of cannabis. January 18, 2018 Page 7

8 Forecasts/Expectations For The Canadian Market Medical Marijuana In 2013, Health Canada released its forecast for the medical market, calling for the industry to have up to 450,000 patients signed up by 2024 and to generate C$1.3B in revenue. Assuming the average patient consumes 0.75 g/day, this would translate to 123,188 kg/year and an average retail price of C$10.55/g. Statista is forecasting the Canadian medical marijuana industry to grow by 151% in 2017 and 79% in 2018, reaching C$1.146B in 2020 (based on prices of C$7.50/g for dried marijuana and C$2.6/mL for oil/extract Exhibit 2). Its model also incorporates the system to reach 715K patients by 2020 (with 501,381 of them using dried marijuana). Exhibit 2. Forecasts For Canadian Medical Marijuana Market $1,400 $1,200 $1,000 $800 $600 $400 $200 $ % 160% 140% 120% 100% 80% 60% 40% 20% 0% Industry Size % Growth Source: Statista. Recreational Marijuana Market Statista forecasts that if the Canadian marijuana market is legalized by 2018, the combined medical and recreational market would be worth C$2.8B by 2020 implying a C$1.7B recreational market size. However, looking at the actual results from U.S. states where recreational marijuana has been legal for some time, 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. January 18, 2018 Page 8

9 Exhibit 3. Potential Size Of Canada s Recreational Market Using Various Sources Rationale Year Market Size PBO midpoint estimates, Nov ,000 kg C$4.9B PBO midpoint estimates, Nov ,000 kg C$4.9B NB MOUs midpoint estimates, Nov ,992 kg C$7.7B Government of Canada estimate, late C$7B - C$8B Washington state TTM sales extrapolation, Oct C$11.2B Washington state TTM sales extrapolation, Apr ,760 kg Colorado TTM sales extrapolation, Oct C$12.1B MPG estimates, Dec ,000 kg Source: Parliamentary Budget Officer, state/provincial/federal governments, Marijuana Business Daily, Beacon Securities. We believe the Parliamentary Budget Officer s (PBO) report in November 2016 provided a useful outlook for the industry. Per the PBO s report, legalization is likely to put downward pressure on production costs. At the onset of legalization, prices may be higher [than the mid-point estimate of C$7.50 currently] due to the potential for supply shortages and regulatory changes. As the legal market matures, there will be downward pressure on wholesale prices as producers production costs decline. However, long-term prices are less predictable as consumer tastes and product offerings, including value-added products, evolve. Per the PBO s projections (Exhibit 4), producers of marijuana will, industry-wide, see their costs of production fall between 2018 and 2021 from C$2.25/g to C$1.75/g, yet be able to maintain their margin on a per gram basis (at C$2.25/g). The lower expected production costs reflect the potential for growing economies of scale, higher labour productivity, and the application of more productive agricultural approaches and technology. The resulting gross margin percent for producers is therefore set to increase from 50% to 56%. Meanwhile, retailers are expected to maintain their margins at 40% between 2018 and The retailer s margin would therefore decrease on a per gram basis (from C$3.00/g to C$2.67/g) and the final pre-tax sales price would fall from C$7.50/g to C$6.67/g. January 18, 2018 Page 9

10 Exhibit 4. Average Pre-Tax Price Projection (C$) Source: Parliamentary Budget Officer. PBO s retail price projections do not take into account supply shortages. However, the potential for such shortages in Canada exists. We point to last quarter s industry production of 13,574 mt (54,296 kg annualized) representing just 8% of the PBO s projected 2018 volume (655,000 kg). Data from Colorado, Washington and Oregon suggests that reported cannabis use increased substantially between 10 per cent and 30 per cent in those three states among those aged 18 and over, during the period leading up to legalization. Exhibit 5. Past-Year Cannabis Use in Select U.S. States Leading up to Legalization Past-Year Cannabis Use among Persons 18 Years and Over Change since Source: Parliamentary Budget Officer. Colorado Washington Oregon % 15.29% 17.54% % 17.58% 19.21% % 19.06% 19.50% % 15.0% 9.5% % 24.7% 11.2% January 18, 2018 Page 10

11 Conclusion Based on the above calculations, the Canadian medical marijuana market is growing very quickly and should be able to comfortably be a C$1+B industry in itself. Layering on recreational usage, the total size of the industry likely multiplies several fold potentially reaching C$11B. For context, this would put retail marijuana sales essentially equal to annual sales at furniture stores (C$10.6B) although less than at beer, wine and liquor stores (C$21.3B). While it is difficult to peg a specific number and how quickly it transitions from the black market to the legal market, it is clear to us that marijuana is already a major industry and legalization should unlock profits for investors to earn legitimately. Unlike other exponential growth industries which need to gain acceptance and adoption over time, the Canadian marijuana industry is already well established and sizeable today. That said, polling suggests that the existing market will only grow once legalized as new users enter. This has been the case in U.S. states. When legal, the industry may need 12x more production than the industry can produce now. Producers will need to ramp up capacity in the interim. Prices of legal marijuana may be higher initially due to possible supply constraints. Eventually prices will come in as supply increases. As producers are looking to ramp up capacity, consolidation has already emerged as a theme in the industry. January 18, 2018 Page 11

12 Company Overview Established in 1989, Village Farms International Inc. (VFF-T) is one of the largest and longest-running greenhouse growers in North America. It produces and distributes premium quality tomatoes, bell peppers, and cucumbers to national grocers, primarily retail supermarkets and fresh food distribution companies, in the U.S. and Canada. The company owns and operates a total of seven large-scale greenhouse facilities in British Columbia and Texas, and has partnered with greenhouses in British Columbia, Ontario, and Mexico, enabling it to service its customers with fresh produce 365 days a year reliably. Over its history, Village Farms has developed multiple greenhouse complexes in places including Pennsylvania, New York and Virginia. Exhibit 6. Village Farms Network Of Operations Source: Investor presentation All products are grown hydroponically (i.e., without the use of soil), using coconut fibre and rockwool, in a glass-enclosed structure with advanced proprietary technology that regulates climate conditions and yields consistent, high-quality produce that fetches a premium price. The company has co-developed exclusive varieties of tomatoes, some of which have won industry awards. With crop growing practices that are environmentally sustainable and resource-efficient, the company leads the greenhouse vegetable industry in North America in terms of sales, distribution, and marketing. This is achieved through the business focus on building and maintaining strong customer relationships, and upholding the highest standards of food safety. The Company also owns and operates, through its subsidiary VF Clean Energy Inc., a 7 MW power plant that generates and sells electricity, contributing ~$2MM in annual revenue. January 18, 2018 Page 12

13 Exhibit 7. Financial Profile Over Time (US$, 000s) 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% Source: Company reports, Beacon Securities. Seeing margins on produce decline over the past few years due to competition from Mexican producers, the company has proactively decided to branch out into cannabis. Pure Sunfarms: Cannabis Joint Venture On June 6, 2017, Village Farms announced that it had entered into a joint venture agreement with an existing LP, Emerald, to form a new company (later names Pure Sunfarms Corp.) to pursue cannabis production in Canada. Management will not conduct any cannabis business in the U.S. until it is federally legal. With Village Farms expertise in low-cost greenhouse growing and Emerald s cannabis compliance/licensing and intellectual property, the resulting new corporation is expected to develop and sell highquality, low-cost cannabis at a large scale. To initiate the JV, Village Farms has contributed a 1.1MM sq. ft. (25- acre) greenhouse facility in Delta, British Columbia (Delta 3, or D3), which was determined to have a fair value of C$20MM. Emerald has agreed to match this amount in cash to fund the conversion of the facility, resulting in a 50% interest for each party (in the form of common shares in Pure Sunfarms). Pure Sunfarms has commenced physical conversion of one quadrant (Q1, ~250,000 sq. ft.) of its Delta 3 facility for the cultivation of cannabis. The company expects to complete the conversion of Q1 this quarter and, subject to the receipt of cultivation and sales licenses from Health Canada, begin selling dried cannabis on or before July Q1 has an expected production capacity of 18,750 kg. January 18, 2018 Page 13

14 Exhibit 8. Pure Sunfarms Overview Source: Company reports. Exhibit 9. Timeline Towards Pure Sunfarms First Cannabis Sales Source: Company reports. January 18, 2018 Page 14 The company expects all four quadrants of Delta 3 to start commercial production in Q4/FY19, and be able to reach an annual production rate of 75,000 kg in Management estimates that the

15 greenhouse would be a more efficient use for cannabis cultivation, potentially generating revenue 10-15x that of current produce, with an EBITDA margin >50%. The JV agreement also gives Pure Sunfarms the options to lease or purchase from Village Farms its Delta 2 facility (1.1MM sq. ft. (25 acres)) and its Delta 1 facility (2.6MM sq. ft. (60 acres), both located adjacent to Delta 3 (Exhibit 10). Exhibit 10. Village Farms Existing Greenhouse Facilities Source: Company reports. The Board of Directors of Pure Sunfarms Corp. currently consists of six directors three appointed by Emerald and three appointed by Village Farms. If either company s ownership interest in Pure Sunfarms Corp. falls below 35%, such entity will lose one of the board members appointed by it. We note that Pure Sunfarms will be operating as a separate arms length party to each of its major shareholders. Accordingly, Emerald will not be guaranteed a specific percentage of production, or preferential pricing but will be able to purchase its output at rates prevailing in the market. Pure Sunfarms is already assessing what types of extraction equipment will be required, as it plans to extract at least 30% of its production in 2019 and beyond. Insiders Own 26% Of Shares Outstanding Senior Management Bios Michael A. DeGiglio CEO, President, Director: Michael DeGiglio founded the company and has served as its CEO since inception in He started his career in the greenhouse industry in 1984 by founding Agro Dynamics Inc., which got acquired by EcoScience in January 18, 2018 Page 15

16 1992. Mike then went on to become CEO of EcoScience, a position he held until 2001 when the company was acquired by Village Farms. Stephen C. Ruffini, MBA, CPA CFO, Executive VP, Director: Stephen Ruffini joined Village Farms in January 2009 and serves as its CFO. He has 25 years of finance, operations, investor relations, and M&A experience. He previously worked at Arthur Andersen as a Senior Tax Manager from 1984 to Exhibit 11. Insider Ownership Common Shares Common Shares % of Total Warrants Options Name Title / Role Michael A. DeGiglio CEO, President, Director 9,871, % 0 400,000 Stephen C. Ruffini CFO, Executive VP, Director 500, % 0 374,399 Christopher C. Woodward Director 163, % 0 50,000 David Holewinski Director 145, % 0 50,000 John R. McLernon Chairman, Chairman of the Compensation Committee, Director 103, % 0 50,000 John P. Henry Chairman of the Audit Committee & Director 35, % 0 50,000 Dr. Roberta Cook Director 10, % 0 25,000 Total Insider Ownership 10,828, % 0 999,399 Total 42,049, % 300,000 2,241,065 Sources: SEDI, Company Filings, Beacon Securities. Exhibit 12. Pictures Of Village Farms Delta Facilities December 2017 Source: Beacon Securities. January 18, 2018 Page 16

17 Cannabis at Village Farms: Value Proposition 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 timeefficient 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 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). Village Farms is a leader in biological applications. The company has had the use of 25 biological applications approved by agricultural regulators for use in greenhouses. January 18, 2018 Page 17

18 Exhibit 13. Breakdown Of Village Farms BC Greenhouse Facilities Source: Company reports. 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. The company currently sells to large buyers. It has the IT systems, the breadth and depth of SKUs, the logistics of maintaining a regular and stable supply chain, and 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. Management appears conservative in their forecasts. The company estimates their yield at ~68 g/sq. ft., which is considerably lower than many of its peers embarking on greenhouse expansions. January 18, 2018 Page 18

19 Revenue Model and Forecast Pure Sunfarms The Main Driver Of Value Creation Exhibit 14. Highlights of Our Model 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 - Q ,219 1,625 2, ,625 2,031 3,656 2,438 2,844 3,250 3,656 12,188 16,250 From D3 - Q ,625 2,031 2,438 2,844 8,938 3,250 3,656 4,063 4,063 15,031 16,250 From D3 - Q ,625 2,031 3,656 2,438 2,844 3,250 3,656 12,188 16,250 From D3 - Q ,625 2,438 3,250 8,125 16,250 kg and kg equivalents sold ,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 Source: Beacon Securities estimates. Production Schedule Village Farms anticipates converting all of the first quadrant (Q1) of D3 in Q1/FY18 and obtaining its sales license in June, such that it is ready to begin commercial production in July 2018 as recreational cannabis is legalized. As the bulk of growing the first full harvest will largely take place over the summer, supplemental lighting will not be essential. Once conversion of Q1 is complete (March 2018), the company plans to commence the conversion of Quadrant 2 (Q2), which should be ready for production in Q4/FY18. At this time (October 2018), Q1 will go dark since it does not have supplemental lights. In March 2019 Q1 and Q2 will be in production, with Quadrant 3 (Q3) also commencing production. In October 2019 Quadrant 4 (Q4) is expected to be producing, and the company anticipates being on a 75,000 kg annual run rate of production. We have generally kept to this timeline in our model with a two quarter lag between when commercial production is expected to commence and when sales of product is recognized as revenue. We also assume that it takes several quarters for each quadrant to reach its full stride. The major differentiator is that while management is projecting 75,000 kg a year of production when all of D3 is up and January 18, 2018 Page 19

20 running in 2020, we are modelling only a 65,000 kg run rate starting in Q1/FY21. Exhibit 15. Illustration Of Production Timelines For D3 Source: Company reports. Financial Model Highlights Our model assumes that Pure Sunfarms can realize revenue of C$5/g when sales commence in Q3/FY18, and that this amount trickles down to C$4/g starting in Q4/FY19. This is below the C$4.50/g predicted by the PBO report. On the cost side, we assume Pure Sunfarms cost per gram starts at C$2 and declines over time to reach C$1 by Q1/FY21. We model overhead expenses at C$39MM in Q1/FY21, representing 15% of revenue. We feel this is conservative, noting that it is well above Village Farms current rate of 8-10% (Pure Sunfarms should have similar revenue, but without public company costs). Ultimately, overhead will also depend on the extent to which Pure Sunfarms launches and can market its own brands as opposed to white labelling for others. Using a 26% effective tax rate, we calculate that Pure Sunfarms turns net income positive when revenue starts in Q3/FY18 and generates C$6.2MM in 2019, C$28.4MM in 2020 and C$46.2MM when running at full speed in January 18, 2018 Page 20

21 Village Farms Steady Eddie Operation Supplemented By Cannabis Exhibit 16. Highlights of Our Model 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% Source: Beacon Securities estimates. We assume Village Farms produce business maintains a revenue run rate of US$144MM in 2018 and beyond approximately 10% below its trailing revenue (as D3 will no longer be contributing). At an assumed 5% EBITDA margin we are modelling an annual EBITDA (excluding Pure Sunfarms contribution) of US$7.5MM going forward, versus Trailing EBITDA of US$8.5MM. Including Village Farms share of Pure Sunfarms income, we model big increases in EBITDA to US$13.7MM in 2019, US$35.9MM in 2020 and US$53.6MM in January 18, 2018 Page 21

22 Competitive Landscape The number of LPs has doubled from 41 in March 2017 to 86 currently. On December 20, 2017, the Globe and Mail stated that the federal government would more than triple the number of official producers as it is in the final stage of licensing 208 new cannabis companies. We expect many more licenses to be granted Health Canada has reportedly increased staffing to try to expedite the licensing process, particularly to allow smaller niche growers although we believe that the newer companies would have a tougher time to secure funding and shelf space. Pure Sunfarms already has much of the infrastructure in place and is well capitalized with two public companies as shareholders. When the recreational market opens up for legalization, Pure Sunfarms should have 250,000 sq. ft. of greenhouse space operational (with another 750,000 sq. ft. on the way), which would put it amongst the largest LPs and should enable it to secure its share of sales. Even though margins have eroded over the past few years due to competition from Mexican producers, the company s existing produce business is able to pay the bills (it has a positive free cash flow) while investors wait for larger returns from Pure Sunfarms to kick in. The vast majority of LPs are currently burning cash. January 18, 2018 Page 22

23 Valuation: What s It Worth? Exhibit 17. Market Comparables Marijuana Comparables EV/Sales EV/EBITDA Company Ticker Year End Last Price Market Cap. (MM) Net Cash (MM) EV (MM) 2017E 2018E 2019E 2020E 2021E 2017E 2018E 2019E 2020E 2021E Village Farms International Inc VFF.TO DEC $7.67 $323 -$40 $ x 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, x 73.7x 18.9x 11.5x 7.1x x 47.9x 25.4x 20.7x Aphria Inc APH.TO MAY $22.05 $3,973 $331 $3, x 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, x 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 $ x 13.5x 6.1x 8.2x x 16.1x 14.8x - CanniMed Therapeutics Inc CMED.TO OCT $27.82 $680 $40 $ x 16.7x 8.0x 6.1x x 19.7x 11.7x - OrganiGram Holdings Inc OGI.V AUG $4.94 $577 $95 $ x 17.1x 4.9x 3.5x 2.4x x 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 $ x 53.0x 5.9x 2.9x 2.4x x 5.9x 4.5x Group Average $2,396 $169 $2, x 44.2x 10.9x 6.7x 4.7x 532.8x 188.3x 29.7x 15.5x 13.6x 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$35.9 US$ % 5.2% 9.5% 25.0% 37.3% Canopy Growth Corp Other Public Companies RESTRICTED Aurora Cannabis Inc $19.9 $70.6 $275.7 $451.3 $ $3.8 $19.3 $108.6 $204.6 $ % 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 $ % 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 $ % 14.9% 34.0% 38.1% 42.5% Cronos Group Inc RESTRICTED CannTrust Holdings Inc $20.8 $72.0 $158.8 $ $0.3 $20.8 $60.6 $ % 38.1% 55.5% - CanniMed Therapeutics Inc $17.1 $38.3 $80.0 $ $0.4 $8.4 $32.5 $ % 40.6% 52.6% - OrganiGram Holdings Inc $7.6 $28.2 $97.7 $139.5 $ $6.4 $5.4 $33.5 $50.7 $ % 34.2% 36.3% 32.6% The Hydropothecary Corp Sales (MM) EBITDA (MM) EBITDA Margin % Company 2017E 2018E 2019E 2020E 2021E 2017E 2018E 2019E 2020E 2021E 2017E 2018E 2019E 2020E 2021E RESTRICTED Supreme Cannabis Company Inc $0.5 $8.7 $78.1 $160.9 $ $5.4 -$6.1 $29.6 $77.5 $ % 48.2% 52.9% Group Average 24% 23% 37% 44% 37% Note: VFF and FIRE estimates are Beacon Securities. Estimates for all other companies are consensus. VFF s sales and EBITDA are in US$, all other figures are in C$. EBITDA for VFF includes share of net income from Pure Sunfarms JV. Source: Company reports, Thomson Reuters, Beacon Securities estimates. Village Farms shares currently trade at an EV/2019E EBITDA (including its share from Pure Sunfarms) multiple of 21.2x representing a large discount to the group, at 29.7x. The company s shares trade at an EV/2020E EBITDA (including its share from Pure Sunfarms) multiple of 8.1x. While we are modelling only 21% of Village Farms 2020E EBITDA to come from its produce business, the company s shares trade at a 48% discount to the group at 15.5x. Village Farms shares currently trade at an EV/2021E EBITDA (including its share from Pure Sunfarms) multiple of just 3.0x, well below its peer group (13.6x). January 18, 2018 Page 23

24 Exhibit 18. Justification of Target Price (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 (000's) Pure Sunfarms Value Of Pure Sunfarms JV Village Farms' Share C$791,973 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% Source: Thomson Reuters, Company reports, Beacon Securities. January 18, 2018 Page 24 We use a sum of the parts approach in determining our target price for Village Farms. 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

25 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. We 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). January 18, 2018 Page 25

26 Potential Catalysts Licensing Approval From Health Canada. As noted above, 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 for the conveniently located Delta 2 and Delta 1 greenhouses a total of 3.7 million square feet (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. January 18, 2018 Page 26

27 Potential 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. In Exhibit 19 we ran scenarios for the conversion of Delta 2 (1.1MM sq. ft. (25 acres)) and Delta 1 (2.6MM sq. ft. (60 acres)). D2 is identical in size to D3. Accordingly, we model Pure Sunfarms reaching a 130,000 kg run rate under this scenario but a year later (i.e., in 2022). We incorporate a modest discount on pricing to be able to sell all this product down to C$3.75/g, on the company s entire production. Under this scenario, Pure Sunfarms would have to spend another C$55MM in capex to convert D2, for which we assume Village Farms would raise equity to cover its share. Under this scenario, Pure Sunfarms would be generating net income of C$210MM on revenue of C$488MM. Our 12% DCF outputs a total value of C$1.4B for Pure Sunfarms, with C$708MM being attributable to Village Farms. We apply a haircut to the value of Village Farms produce business (as it will have one less greenhouse). Accounting for a higher share count, this approach results in an implied value for Village Farms shares of C$ At 2.6MM sq. ft., D1 is 2.4x the size of D3. Adding production from D1 as well, we model total output of 290,000 kg in this scenario in 2022 just below management s conservative projected yield of 300,000 kg annually. Assuming further price compression to C$3.50/g, Pure Sunfarms would generate C$423MM of net income on revenue of C$1B, and have a total value of C$2.7B per our DCF (C$1.4B for Village Farms share). Incorporating more dilution from Village Farms to fund the required capex of C$130MM (although Pure Sunfarms could get debt), and another haircut to its produce business, we calculate an implied value for Village Farms shares of C$ January 18, 2018 Page 27

28 Exhibit 19. Scenarios For Pure Sunfarms & Village Farms Assuming Options For D2 & D1 Are Exercised (000's) Scenarios Actual Model (Only D3) Adds D2 Adds D2 & D1 Pure Sunfarms Steady State Production (kg) 65, , ,000 Year Of Steady State Production 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 Source: Company reports, Beacon Securities. January 18, 2018 Page 28

29 Key Risks Industry Wide Risks Legalization Snafus. While political considerations seem to suggest that marijuana legalization in Canada is virtually certain, nothing in politics is 100%. Pressure/reaction from other governments may be a factor in how Canada s government proceeds. There has been speculation that the Senate may slow things down. There is also the potential for provincially-caused delays. Onerous Regulations. The upcoming regulatory regime may crimp the supply side (requirements for production, taxes raising costs, advertising restrictions inhibiting companies ability to differentiate/promote their product, regulations in different provinces/municipalities, etc. may make it inefficient to scale), or the demand side (making it too difficult/expensive to buy legally, sending users back to the black market, warnings on packaging scaring customers from consumption, allowing very restrictive variety on different formats, etc.). Eventual Oversupply. While we believe newcomers face an uphill battle (lengthy licensing process, low probability of success, financing requirements, established competitors), Health Canada may issue too many licenses in the longer term which could commoditize the product, with supply eventually outstripping demand, putting pressure on prices. Banking. Scotiabank and Royal Bank have indicated that they will not provide accounts to businesses associated with the marijuana industry. While other financial institutions such as Alterna Savings and Credit Union are eager to obtain share in this industry, there remains a risk that companies in this industry experience difficulties interfacing with the financial system. Company Specific Risks Crop Failure. The risk of a crop failure (low quality and/or yields) exists for any producer. Seasonality. The company makes the lowest revenue during Q1 and Q2. This is likely due to the nature of the agricultural business being dependent on factors such as weather, insects, plant and seed diseases, etc. The impact of this should be reduced as cannabis production ramps up. January 18, 2018 Page 29

30 Timeline Towards Execution. Should the conversion of any or all of the four quadrants of the Delta 3 facility be impacted by delays, cost overruns, poor yields, or cash flow problems, our target price may be revised downwards. Natural Catastrophes. The company lost one of its greenhouse facilities in Marfa, Texas when it suffered a catastrophic hailstorm on May 31, While nearly every business is subject to unforeseen risks such as these, it is worth noting that all of Village Farms` potential cannabis growing facilities (Delta 3, Delta 2, and Delta 1) are concentrated around one location and therefore more prone to be impacted in case of a natural disaster. Licensing. There is no guarantee that the company will be able to obtain its cultivation license/sales approval in a timely manner, maintain a positive relationship with Health Canada, renew licenses for its facilities annually, or achieve successful licensing for new buildings in the future. Foreign Exchange. Village Farms reports in US$. Its produce business primarily generates revenue in the U.S. However, Pure Sunfarms will be operating exclusively in C$, and Village Farms shares trade in C$. Accordingly, changes in f/x may impact the company s financial results and/or share price. January 18, 2018 Page 30

31 Initiating Coverage With A Buy Rating And A C$11.00 Target Price We are initiating coverage of Village Farms with a Buy rating and a C$11.00 target price, representing a projected total return of 43%. The company has a track record of running a multi-million dollar agricultural operation over decades and selling to large clients on both sides of the border. There will undoubtedly be a learning curve for the transition to cannabis, however, we believe this to be shorter than for many operators. The company s scale should help it be a national low cost leader as pricing ultimately gets squeezed. January 18, 2018 Page 31

32 Appendix A: Consolidated Financials Village Farms International Inc. Consolidated Statement of Comprehensive Income (Loss) (000's) Q4/FY17 FY17 FY18 FY19 FY20 FY21 Revenue Produce Business U.S. US$27,000 US$127,608 US$119,273 US$119,273 US$119,273 US$119,273 Canada US$4,848 US$24,341 US$22,392 US$22,392 US$22,392 US$22,392 Energy - Canada US$543 US$1,984 US$1,984 US$1,984 US$1,984 US$1,984 Consolidated Revenue US$32,391 US$153,933 US$143,648 US$143,648 US$143,648 US$143,648 Variable Costs Purchased Produce US$8,658 US$41,875 US$38,553 US$38,553 US$38,553 US$38,553 Raw Materials And Consumables Used US$5,752 US$37,524 US$34,347 US$34,347 US$34,347 US$34,347 Depreciation And Amortization US$1,687 US$7,335 US$6,748 US$6,748 US$6,748 US$6,748 Transportation And Storage US$5,189 US$20,638 US$19,093 US$19,093 US$19,093 US$19,093 Employee Compensation And Benefits US$7,417 US$33,856 US$31,212 US$31,212 US$31,212 US$31,212 Total COGS US$28,702 US$141,227 US$129,953 US$129,953 US$129,953 US$129,953 Gross Margin US$3,689 US$12,706 US$13,696 US$13,696 US$13,696 US$13,696 Operating Expenses Change In Biological Asset US$0 -US$817 US$0 US$0 US$0 US$0 Employee Compensation And Benefits -US$1,874 -US$8,745 -US$8,058 -US$8,058 -US$8,058 -US$8,058 Marketing -US$536 -US$890 -US$855 -US$855 -US$855 -US$855 Professional Services -US$306 -US$1,257 -US$1,257 -US$1,257 -US$1,257 -US$1,257 Office Expenses -US$385 -US$1,600 -US$1,600 -US$1,600 -US$1,600 -US$1,600 Other -US$473 -US$1,517 -US$1,412 -US$1,412 -US$1,412 -US$1,412 Total Operating Expenses -US$3,574 -US$14,826 -US$13,182 -US$13,182 -US$13,182 -US$13,182 Income From Operations US$115 -US$2,120 US$514 US$514 US$514 US$514 Other Income (Expenses) Interest Expense US$667 US$2,683 US$2,408 US$2,261 US$2,104 US$1,948 Foreign Exchange Loss (Gain) US$0 -US$57 US$0 US$0 US$0 US$0 Other Expense (Income) US$0 -US$96 US$0 US$0 US$0 US$0 Share Of Loss (Gain) From Joint Venture US$300 US$520 US$1 -US$6,245 -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 Pretax Income (Loss) -US$852 US$3,394 -US$1,895 US$4,498 US$26,858 US$44,742 Recovery (Payment) Of Income Taxes -US$143 -US$326 -US$492 -US$454 -US$414 -US$373 Net Income -US$708 US$3,721 -US$1,403 US$4,952 US$27,272 US$45,115 EPS - Basic -US$0.02 US$0.10 -US$0.03 US$0.12 US$0.64 US$1.05 EPS - Diluted -US$0.02 US$0.09 -US$0.03 US$0.11 US$0.62 US$1.03 EBITDA (Ex-Pure Sunfarms Share) US$1,877 US$6,868 US$7,462 US$7,462 US$7,462 US$7,462 EBITDA (With Pure Sunfarms Share) US$1,577 US$6,348 US$7,461 US$13,707 US$35,911 US$53,638 Source: Company reports, Beacon Securities estimates. January 18, 2018 Page 32

33 Village Farms International Inc. Consolidated Statement of Cash Flows (000's) Q4/FY17 FY17 FY18 FY19 FY20 FY21 Cash Flows From Operating Activities Net Income -US$708 US$3,721 -US$1,403 US$4,952 US$27,272 US$45,115 Items Not Afffecting Cash Depreciation And Amortization US$1,687 US$7,440 US$6,748 US$6,748 US$6,748 US$6,748 Amortization Of Deferred Charges US$0 US$54 US$0 US$0 US$0 US$0 Loss On Sale Of Assets US$0 -US$8,564 US$0 US$0 US$0 US$0 Share Of Loss From Joint Venture US$300 US$520 US$1 -US$6,245 -US$28,449 -US$46,176 Interest Paid US$667 US$2,623 US$2,408 US$2,261 US$2,104 US$1,948 Share-Based Compensation US$75 US$635 US$200 US$200 US$200 US$200 Deferred Income Taxes US$0 -US$585 US$0 US$0 US$0 US$0 Change In Biological Asset US$0 US$817 US$0 US$0 US$0 US$0 Cash Flows From Operating Activities - Before US$2,020 US$6,660 US$7,954 US$7,916 US$7,875 US$7,835 Changes in Non-Cash W/C Changes in Non-Cash W/C US$0 -US$3,225 US$0 US$0 US$0 US$0 Cash Flows From Operating Activities US$2,020 US$3,435 US$7,954 US$7,916 US$7,875 US$7,835 Cash Flows From Investing Activities Purchases Of Property, Plant And Equipment -US$500 -US$1,671 -US$2,000 -US$2,000 -US$2,000 -US$2,000 Investment In Pure Sunfarms Jv US$0 US$0 -US$11,200 US$0 US$0 US$0 Cash Flows From Investing Activities -US$500 -US$1,671 -US$13,200 -US$2,000 -US$2,000 -US$2,000 Cash Flows From Financing Activities Proceeds From Borrowings US$0 US$6,113 US$0 US$0 US$0 US$0 Repayments On Borrowings -US$4,000 -US$9,488 -US$2,025 -US$2,700 -US$2,700 -US$2,700 Interest Paid On Long-Term Debt -US$667 -US$2,623 -US$2,408 -US$2,261 -US$2,104 -US$1,948 Proceeds From Exercise Of Stock Options US$0 US$26 US$0 US$0 US$0 US$0 Payments On Capital Lease Obligations US$0 -US$40 US$0 US$0 US$0 US$0 Public Offering US$9,841 US$9,841 US$5,000 US$0 US$0 US$0 Exercise Of Warrants US$0 US$0 US$0 US$0 US$776 US$0 Cash Flows From Financing Activities US$5,174 US$3,829 US$567 -US$4,961 -US$4,028 -US$4,648 Net Cash And Cash Equivalents Inflow (Outflow) US$6,694 US$5,606 -US$4,679 US$955 US$1,847 US$1,187 Cash And Cash Equivalents, Opening Balance US$4,285 US$5,373 US$10,979 US$6,301 US$7,256 US$9,103 Cash And Cash Equivalents, Ending Balance US$10,979 US$10,979 US$6,301 US$7,256 US$9,103 US$10,290 Source: Company reports, Beacon Securities estimates. January 18, 2018 Page 33

34 Village Farms International Inc. Consolidated Balance Sheet (000's) Q4/FY17 FY17 FY18 FY19 FY20 FY21 Assets Current Assets Cash US$10,979 US$10,979 US$6,301 US$7,256 US$9,103 US$10,290 Trade Receivables US$12,487 US$12,487 US$12,487 US$12,487 US$12,487 US$12,487 Other Receivables US$750 US$750 US$750 US$750 US$750 US$750 Inventories US$14,112 US$14,112 US$14,112 US$14,112 US$14,112 US$14,112 Prepaid Expenses And Deposits US$1,216 US$1,216 US$1,216 US$1,216 US$1,216 US$1,216 Biological Asset US$5,305 US$5,305 US$5,305 US$5,305 US$5,305 US$5,305 Current Assets US$44,849 US$44,849 US$40,171 US$41,126 US$42,973 US$44,160 Non-Current Assets Property, Plant And Equipment US$81,905 US$81,905 US$77,157 US$72,409 US$67,661 US$62,913 Investment In Joint Venture US$15,913 US$15,913 US$27,112 US$33,357 US$61,806 US$107,982 Other Assets US$1,837 US$1,837 US$1,837 US$1,837 US$1,837 US$1,837 Non-Current Assets US$99,655 US$99,655 US$106,106 US$107,604 US$131,304 US$172,732 Total Assets US$144,505 US$144,505 US$146,277 US$148,729 US$174,277 US$216,892 Liabilities Current Liabilities Trade Payables US$10,862 US$10,862 US$10,862 US$10,862 US$10,862 US$10,862 Accrued Liabilities US$5,971 US$5,971 US$5,971 US$5,971 US$5,971 US$5,971 Operating Loan US$3,000 US$3,000 US$3,000 US$3,000 US$3,000 US$3,000 Current Maturities Of Long-Term Debt US$3,337 US$3,337 US$3,337 US$3,337 US$3,337 US$3,337 Current Maturities Of Capital Lease Obligations US$73 US$73 US$73 US$73 US$73 US$73 Current Liabilities US$23,243 US$23,243 US$23,243 US$23,243 US$23,243 US$23,243 Non-Current Liabilities Long-Term Debt US$35,684 US$35,684 US$33,659 US$30,959 US$28,259 US$25,559 Long-Term Maturities Of Capital Lease Obligations US$197 US$197 US$197 US$197 US$197 US$197 Deferred Tax Liability US$4,131 US$4,131 US$4,131 US$4,131 US$4,131 US$4,131 Deferred Compensation / Other Liabilities US$1,141 US$1,141 US$1,141 US$1,141 US$1,141 US$1,141 Non-Current Liabilities US$41,153 US$41,153 US$39,128 US$36,428 US$33,728 US$31,028 Total Liabilities US$64,396 US$64,396 US$62,371 US$59,671 US$56,971 US$54,271 Shareholders' Equity Share Capital US$35,264 US$35,264 US$40,264 US$40,264 US$41,041 US$41,041 Contributed Surplus US$1,732 US$1,732 US$1,932 US$2,132 US$2,332 US$2,532 Revaluation Surplus US$4,321 US$4,321 US$4,321 US$4,321 US$4,321 US$4,321 Accumulated Other Comprehensive Loss -US$379 -US$379 -US$379 -US$379 -US$379 -US$379 Deficit US$39,171 US$39,171 US$37,768 US$42,720 US$69,992 US$115,107 Total Shareholders' Equity US$80,109 US$80,109 US$83,906 US$89,059 US$117,307 US$162,621 Total Liabilities And Equity US$144,505 US$144,505 US$146,277 US$148,730 US$174,278 US$216,892 Source: Company reports, Beacon Securities estimates. January 18, 2018 Page 34

35 Disclosure Requirements Does Beacon, or its affiliates or analysts collectively, beneficially own 1% or more of any class of the issuer's equity securities? Yes No Does the analyst who prepared this research report have a position, either long or short, in any of the issuer s securities? Yes No Does Beacon Securities beneficially own more than 1% of equity securities of the issuer? Yes No Has any director, partner, or officer of Beacon Securities, or the analyst involved in the preparation of the research report, received remuneration for any services provided to the securities issuer during the preceding 12 months? Yes No Has Beacon Securities performed investment banking services in the past 12 months and received compensation for investment banking services for this issuer in the past 12 months? Yes No Was the analyst who prepared this research report compensated from revenues generated solely by the Beacon Securities Investment Banking Department? Yes No Does any director, officer, or employee of Beacon Securities serve as a director, officer, or in any advisory capacity to the issuer? Yes No Are there any material conflicts of interest with Beacon Securities or the analyst who prepared the report and the issuer? Yes No Is Beacon Securities a market maker in the equity of the issuer? Yes No Has the analyst visited the head office of the issuer and viewed its operations in a limited context? Yes No Did the issuer pay for or reimburse the analyst for the travel expenses? Yes No All information contained herein has been collected and compiled by Beacon Securities Limited, an independently owned and operated member of the Investment Industry Regulatory Organization of Canada (IIROC). All facts and statistical data have been obtained or ascertained from sources, which we believe to be reliable, but are not warranted as accurate or complete. All projections and estimates are the expressed opinion of Beacon Securities Limited, and are subject to change without notice. Beacon Securities Limited takes no responsibility for any errors or omissions contained herein, and accepts no legal responsibility from any losses resulting from investment decisions based on the content of this report. This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell securities discussed herein. Based on their volatility, income structure, or eligibility for sale, the securities mentioned herein may not be suitable or available for all investors in all countries. As at December 31, 2017 #Stocks Distribution BUY % Buy Total 12-month return expected to be > 15% Speculative Buy % 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 Under Review 1 1.1% Tender 0 0.0% Tender Clients are advised to tender their shares to a takeover bid or similar offer Total % Dissemination Beacon Securities distributes its research products simultaneously, via , to its authorized client base. All research is then available on via login and password. Analyst Certification The Beacon Securities Analyst named on the report hereby certifies that the recommendations and/or opinions expressed herein accurately reflect such research analyst s personal views about the company and securities that are the subject of the report; or any other companies mentioned in the report that are also covered by the named analyst. In addition, no part of the research analyst s compensation is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report. Beacon Securities Ltd. 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H