• The Toro Company (NYSE: TTC) has agreed to acquire Tornado Infrastructure Equipment Ltd. (formerly Tornado Global Hydrovacs) (TSX-V: TGH) for C$1.92 per share in cash (~US$1.38), valuing the company at approximately C$279 million (~US$200 million) on a fully diluted basis.
• The purchase price implies roughly 1.9x trailing 12-month net sales of about C$149 million (~US$109 million) and reflects several years of strong revenue and earnings growth.
• Since our October 2021 initiating report, when Tornado traded below C$0.45 per share, and our July 2022 update at roughly C$0.55, long-term shareholders have seen a multi-bagger outcome as the business scaled and its strategic value became more visible.
• Record results in 2023 and 2024 followed by continued growth into 2025 and the accretive acquisition of Custom Vacuum Services validated the original investment case around the Red Deer facility, the Ditch Witch / Toro relationship, and expanding North American infrastructure demand.
• Toro’s decision to move from strategic partner to full owner completes that thesis: a larger industry player is paying a strategic premium for Tornado’s engineering, brand, manufacturing footprint, and dealer relationships.
• For investors, the transaction is both a profitable exit and an example of how patient ownership in a small-cap industrial, combined with disciplined execution by management, can be rewarded by the market over time.

Background and Prior Coverage

In October 2021, First Bridge Finance published “Tornado Global: Rare Undervalued Equity Investment Opportunity In Infrastructure” highlighting Tornado Global Hydrovacs Ltd. as a niche hydrovac manufacturer that was undervalued and trading below C$0.45 per share. At that point, the company had recently acquired and built out a much larger facility in Red Deer, Alberta, with the potential to significantly increase production as discussed further in The Financial Post’s coverage of interviews between Company management and First Bridge Finance Managing Partner Ronny Grunwald.

The basic investment case was straightforward. Tornado operated in a structurally growing industry (non-destructive excavation for underground infrastructure) with a strong engineering reputation, a larger and more efficient plant, and a balance sheet that could support growth. In our view, the public market was placing too little value on that capacity and on the incremental earnings power that could be realized as the facility ramped.

In July 2022, we followed up with “Tornado Global: Emerging Industry Leader Supplying New Product Line.” By then, Tornado had signed an important supply and development agreement with the Ditch Witch division of The Toro Company, listed on the OTCQX in the U.S., and was ramping production out of Red Deer. The Ditch Witch agreement called for a minimum of roughly US$44 million in hydrovac sales over four years, plus related IP payments, and helped underpin the view that Tornado was becoming a more significant player in its space.

At the time of those first two articles, Tornado remained a relatively thinly traded small-cap company with zero analyst coverage. The market capitalization and trading volume did not, in our view, fully reflect either the quality of the underlying business or its long-term earnings potential.

From Strategic Partner to Full Ownership

The Ditch Witch relationship was a key turning point. Under the agreement, Tornado co-designed and manufactured an exclusive line of Ditch Witch-branded hydrovac trucks, leveraging its experience and Red Deer capacity while giving Ditch Witch a high-quality product in a growing niche. The contract added visibility to future revenue and further validated Tornado’s engineering capabilities with a well-known industry partner.

Fast forward to October 6, 2025. Toro announced a definitive agreement to acquire Tornado Infrastructure Equipment Ltd. (the new corporate name adopted in December 2024 as the company broadened its product set) for C$1.92 per share in cash (~US$1.38). On a fully diluted basis, the transaction values Tornado at approximately C$279 million (~US$200 million) and implies about 1.9x trailing 12-month net sales of C$149 million (~US$109 million).

The strategic rationale for Toro is straightforward. By acquiring Tornado outright, Toro deepens its presence in vacuum excavation, adds proven hydrovac engineering and manufacturing capabilities, and gains a platform with established relationships across Canada and the United States. Tornado, in turn, benefits from Toro’s scale, balance sheet, and global distribution. For customers, the combined platform should support a broader product range and a more robust long-term supplier.

Financial Performance: 2022-2024 and YTD 2025

Tornado’s recent financial performance helps explain why a larger strategic acquirer was ultimately willing to pay close to C$2.00 per share for the company.

In 2022, Tornado generated approximately C$59.5 million (~US$46 million) in revenue and about C$4.5 million (~US$3.6 million) in EBITDA. This was a solid step up from the prior year and marked the beginning of a more visible ramp at the Red Deer facility.

By 2023, revenue had increased to roughly C$105.0 million (~US$78 million), a year-over-year increase of about 76% as EBITDA rose to around C$12.0 million (~US$9 million) and margins reached double digits, reflecting the benefits of greater volume, operating leverage, and improved purchasing.

In 2024, Tornado reported another record year. Revenue grew about 30% to approximately C$136.9 million (~US$100 million). Unit volume increased to 320 hydrovac trucks in 2024, up from 283 in 2023, as demand for safe, non-destructive excavation continued to grow and as the Ditch Witch agreement and Tornado’s relationship with Custom Truck One Source scaled.

The momentum continued into 2025. For the six months ended June 30, 2025, Tornado reported revenue of roughly C$80.6 million (~US$59 million), up from C$68.3 million (~US$50 million) in the same period of the prior year. Second-quarter revenue alone grew more than 30% year over year, with higher unit volumes and continued benefits from the Red Deer facility and purchasing efficiencies.

In May 2025, Tornado closed the acquisition of Custom Vacuum Services Ltd. (“CustomVac”) for approximately C$28 million (~US$20 million). CustomVac manufactures and services vacuum equipment, including units designed for the transportation of dangerous goods. Management framed the transaction as immediately accretive, with clear opportunities for cross-selling and supply-chain synergies. This deal further supported the idea that Tornado was evolving from a single-product hydrovac manufacturer into a broader infrastructure equipment platform.

Corporate Developments and Strategic Positioning

In December 2024, Tornado Global Hydrovacs changed its name to Tornado Infrastructure Equipment Ltd. The name change was consistent with the direction of the business. Over the prior few years, Tornado had:

• Expanded beyond traditional hydrovac products into complementary vacuum and industrial equipment, a trend accelerated by the CustomVac acquisition;
• Launched Tornado Equipment Finance to help support customers and drive incremental sales;
• Taken steps toward U.S. manufacturing, including supervision of its first Tornado-branded hydrovac assembled in Midland, Texas;
• Broadened its exposure across a range of infrastructure-related end markets, including energy, power transmission, water, environmental services, and telecommunications.

These developments lined up with the themes discussed in our earlier articles: that Tornado had the engineering and manufacturing capability to add products and services over time and that its addressable market was larger than what the legacy financials implied. The rebranding also made Tornado an even more natural strategic fit within Toro’s existing portfolio of construction and infrastructure equipment brands.

Transaction Terms and Valuation

Under the announced agreement, Toro will acquire all of the outstanding shares of Tornado Infrastructure Equipment for C$1.92 per share (~US$1.38) in cash. On a fully diluted basis, the equity value is approximately C$279 million (~US$200 million). Using management’s disclosure of trailing 12-month net sales of about C$149 million (~US$109 million) as of June 30, 2025, the transaction values Tornado at roughly 1.9x trailing sales.

A precise enterprise value multiple will depend on the final net debt figure, including the impact of the CustomVac acquisition. That said, the equity value alone at nearly two times sales and a mid-teens multiple of 2024 EBITDA represents a meaningful re-rating from where the company traded in 2021 and 2022, when it was sub-C$100 million market cap with limited analyst coverage and relatively modest trading liquidity.

Toro has characterized the deal as modestly accretive to earnings, with an estimated US$3 million of run-rate cost synergies over three years. These potential synergies likely come from combined purchasing, manufacturing efficiencies, and shared overhead. Toro is funding the acquisition with debt and expects to retain flexibility around its own capital allocation priorities, which suggests confidence in the cash-generation profile of the combined business.

Share Price Performance and Investor Outcome

From a shareholder standpoint, the progression has been significant. When First Bridge Finance first wrote about Tornado in October 2021, the shares had traded below C$0.45 for an extended period after the company went public. The initial thesis was that, as the Red Deer facility filled and as North American infrastructure spending continued, Tornado’s earnings and free cash flow could support a materially higher share price over time, with C$1.50 identified as a reasonable long-term target.

By July 2022, when the second article was published, the shares traded around C$0.55 on the TSX Venture Exchange, and Tornado had established a secondary quotation on the OTCQX in the U.S., which helped expand the investor base. Even then, the valuation was modest relative to the company’s growth prospects, at roughly 1.3x projected 2022 revenue and about 8.5x projected EBITDA.

The announced C$1.92 per share cash consideration from Toro now represents roughly a 3.5x multiple of the C$0.55 level at the time of the July 2022 update and more than 4x the sub-C$0.45 levels that characterized the stock around the time of the October 2021 initiating report. Investors who underwrote the original operational and strategic thesis and remained patient have realized strong absolute returns, crystallized through an all-cash sale to a high-quality strategic buyer.

Key Takeaways

Tornado’s path from a relatively small Canadian hydrovac manufacturer to a strategic acquisition by Toro highlights several points that are worth keeping in mind when looking at similar situations:

1. Capacity and capability can be mispriced for extended periods. In 2021, Tornado already had the Red Deer facility, a growing parts and service business, and an experienced management team. The public market, however, did not initially place much value on what that platform could earn once it was fully utilized.
2. Strategic partnerships can foreshadow future transactions. The Ditch Witch supply and development agreement materially de-risked Tornado’s growth outlook and validated its technology and manufacturing. It also established Toro as a natural potential acquirer that understood the asset well, which is ultimately what occurred.
3. Conservative balance sheet management adds strategic value. Tornado expanded production, revenue, and earnings without taking on excessive leverage. That discipline protected shareholders on the downside and in turn made the business more attractive to a strategic buyer when the time came.
4. Patience is often required in small-cap industrials. There were periods between 2021 and 2025 when Tornado’s share price did not move in line with the improving fundamentals. Investors who focused on the company’s progress rather than short-term price volatility have now been rewarded with a clean, all-cash exit at a materially higher valuation.

Closing Thoughts

When First Bridge Finance first looked at Tornado Global Hydrovacs in 2021, the company represented a specific type of opportunity: a well-positioned, under-followed industrial business, levered to long-term infrastructure trends, with clear avenues to grow earnings and cash flow as management executed on a credible plan.

Over the following four years, Tornado largely did what it set out to do. It ramped up production through the Red Deer facility, expanded its product and service offerings, entered into and grew strategic partnerships, and ultimately reached a scale and profitability profile that attracted a strategic buyer.

For investors following similar companies today, Tornado’s experience serves as a reminder that small-cap industrials with solid asset bases, aligned management teams, and exposure to durable end markets can, over time, move from being overlooked to being sought after and that the public market does not always recognize that shift immediately.

This article is part of a series by First Bridge Finance, led by Managing Partner Ronny Grunwald, covering Tornado Global Hydrovacs and its eventual acquisition by The Toro Company.

The post Tornado Global: From Undervalued Hydrovac Specialist to Strategic Toro Acquisition appeared first on First Bridge.

* Major new contract: Minimum of $44 million USD in sales over the next four years to the Ditch Witch division of The Toro Company (NYSE:TTC)

* Increasing visibility/trading volume since OTCQX listing in May 2022

Tornado Global Hydrovacs Ltd., “Tornado Global” (OTCQX: TGHLF  $0.42 USD       TSXV: TGH.V  $0.55 CAD) provides a rare opportunity to invest in an ever-emerging industry leader. Recent developments, interviews with Company management and the $1.0 Trillion Dollar Infrastructure Bill passage reinforce First Bridge Finance’s previous projections of earnings growth.

• MAJOR NEW DEAL: The Toro Company (NYSE: TTC), based in Minnesota with over 100 years of operating history, a market cap of $8 billion and annual revenue of $4 billion, is building on its Ditch Witch division’s leadership in the underground construction industry by selecting Tornado Global for its entry into the hydrovacs market. Co-developed and manufactured by Tornado Global, the new product line for Ditch Witch will be the first hydrovacs industry innovation of its kind to be delivered in over a decade.       Link to press release.
• Since acquiring Ditch Witch parent company Charles Machine Works in February 2019, The Toro Company continues to seek opportunities around infrastructure and no doubt plans to make an impact with its new, ‘Tornado Global-manufactured’ product line to maintain its position as “The Underground Authority”.
• Custom Truck One Source continues to be an important distribution partnership. Their $1.5 billion combination with Nesco Specialty Rentals[1] has allowed Tornado to work with a vast rolodex of customers and unite elite management teams with decades of experience focused on servicing the oil and gas, construction, telecom and utilities industries – where Tornado plans to diversify its product towards better positioning in particular. Both companies continue to strategically grow together to outperform the marketplace and expand into new sectors.
• Tornado insiders represent over 50% ownership and are aligned with the Company’s growth.
• Experienced management team led by new President/CEO Brett Newton, a hydrovac industry leader with 25 years of experience that was formerly a partner of Rival Hydrovacs, a Tornado competitor that sold ~500 hydrovacs into the municipal market in the past five years.
• New 63,500 square foot facility in Red Deer, Alberta, has tripled Tornado’s hydrovac production capacity from 80 units in a former leased facility to now 240+ units annually in an owned facility, eliminating outsourcing entirely (See video for facility overview VIDEO )
• Unparalleled cash flow efficiency: Tornado carries zero finished goods inventory and effectively zero receivables given that most ($2.5 million) is < 30 days. Business cash flow is not tied up, rather supporting cost reductions with effective supply chain management practices in place.[2]
• 2021 Annual and Q1 2022 Quarterly Financial Statements showed great revenue growth amid increasing demand in the United States. Q1 2022 revenue of $9.9 million is up 25% YOY with two consecutive quarters of ~$9.5+ million in revenue or $19.4 million over the past 6 months
• 2021 revenue of $32.9 million was below our projection one year ago of $37.7 million but management confirmed industry-wide supply-chain issues had an impact (changing plans for its parts and services business) and $2.6 million in one-time write-downs and charges lowered EBITDA unexpectedly[3]
• With the strong end to 2021, a 25% gross profit margin in the first quarter of 2022[4] and “a healthy Q2 expected amid very high demand and increasing build capacity”, we still expect tremendous EBITDA growth will take place going forward that could exceed $7 million in 2022 from revenues of $47+ million. We have slowed down our revenue projections from one year ago but increased our margin expectations based on the strong showing in Q1 2022. *** The Ditch Witch contract is not included in projections.
  
   
• Visibility of the Company’s public equity has greatly increased since it began trading on the OTCQX exchange on May 5, 2022, making it more easily available to U.S. investors;
  Over 50,000 shares trading daily on average vs. 10,000 shares daily on average just 3 months ago (based on a combination of the volumes of the U.S. and Canadian exchanges)

Tornado’s Stock Continues to Trade at a Discount
Although the price of the shares has appreciated over the past 12 months since we first projected a rise to $1.50 (see Initiating report for industry overview, discussion of the Infrastructure bill and a distribution overview), that was based on revenue growth that has been starting to take hold. At a current share price that’s only 1.3x projected 2022 revenue and 8.5x projected 2022 EBITDA, Tornado remains undervalued as it enters a new era of industry leadership in design, development, and manufacturing.

In Depth Look: Ongoing Innovation
Ditch Witch/Toro seems to agree with long-time customers that Tornado Global is a leader in bringing innovations to the production of hydrovacs. Innovations that demonstrate an appreciation of the fact that operators spend more time working in their hydrovacs than they do at home when not on the road.

Currently the Company is exploring new air only offerings (no water or slurry disposal needed), remote monitoring technology for owners to keep an eye on their fleet in the field and the design of fiberglass/conductive separators with insulated booms for ongoing safety enhancements.

With a strong marketing push, ever-expanding distribution throughout North America and a new generation of Tornado products that will compete heavily in the energy and utility markets, more and more customers are expected to take part in the Company’s growth.

In Depth Look: A Management Team with Deep Industry Expertise and Financial Reporting Excellence

In June 2021 the Company hired CEO Brett Newton, a hydrovac industry leader. He was the Vice President of Operations and Fleet Manager for Badger franchises in Toronto, Hamilton and Niagara, before starting his own hydrovac service operation in Ontario (utilizing Tornado trucks). For the past five years before joining to lead Tornado Global, Brett was a co-founding partner of Rival Hydrovacs where he oversaw the sale of almost 500 hydrovacs into the municipal market. Brett is utilizing his network of over 30 years in the industry to attract additional top-tier talent to Tornado Global from the hydrovac industry. In the past few months, highly regarded salespeople, fitter/fabricators and tank designers have joined the Company to build on over 130 years in combined industry experience in upper management. Individuals that have led hydrovac design, fabrication and production innovations elsewhere are coming together at Tornado Global “with the freedom to create and build the right way”. This also means further cost efficiencies including new chassis production improvements at the OEM level.

With an eye on new product innovation, expansion, and meeting market demand, Tornado Global began trade on the U.S. OTCQX exchange in May of this year; an important step in attracting new investors on a path that we expect will also lead to a further up-listing in the United States. The OTCQX market is the top tier according to OTC Markets where the 400+ companies trading must “meet high financial standards, follow best practice corporate governance, demonstrate compliance with U.S. securities laws, be current in their disclosure, have a board of directors with at least two independent directors and an audit committee.”

Chief Financial Officer Al Robertson and Vice President of Finance Derek Li lead the financial reporting and investor relations responsibilities. Tornado Global Chief Financial Officer Al Robertson has held the position since July 2017. Prior to this he was Chief Financial Officer of CYGAM Energy Inc., a TSX Venture Exchange listed oil and gas company with operations in Tunisia and Italy. From 1982 to 1996, he had a 14-year career culminating as Senior Vice President and Chief Financial Officer of Nowsco Well Service Ltd., a TSX and NASDAQ listed oilfield service company with operations in Canada, the US and internationally. He is also a former Director and Chairman of the audit committee of Wentworth Resources Ltd (formerly Artumas Group Inc.), an Oslo listed public company involved in oil and gas and power generation, with operations in East Africa.  Vice President of Finance Derek Li has spent over 15 years in finance positions at businesses in the greater hydrovac industry. For the last 5 years he has been overseeing finance at Tornado Global; previously he was regional finance manager for Clean Harbors.

Disclaimer
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal, tax advice, or investment matters and readers are advised to consult their own professional advisers. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

First Bridge Investment Group does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any discussion in this document of past or proposed outcomes should not be relied upon as any indication of future outcomes. First Bridge Investment Group does not have any duty to you, whether in contract, tort, under statute or otherwise with respect to or in connection with this publication or the information contained within it. To the fullest extent permitted by law, First Bridge Investment Group disclaims any responsibility to liability to for any loss or damage suffered or cost incurred by you or by any other person arising out of or in connection with you or any other person’s reliance on this publication or on the information contained within it and for any omissions or inaccuracies.

[1] On April 1, 2021, Custom Truck was acquired for $1.475 billion by Nesco Specialty Rentals, another leader in the industry focused significantly on utilities and utility contractors, with an equity investment of $850 million by Platinum Equity (a previous Nesco owner) and $100 million from existing shareholders Blackstone Group, Energy Capital Partners and Capitol Investment.

[2] ‘Secured key manufacturing components, including chassis, into future years through strategic relationships.’ , 2021 10K Filing

[3] Includes $0.4 million repayable to the government for wages based on new claw-back provision in Canada’s COVID Wage Subsidy, $0.4 million for moving expenses to Red Deer, and the write-down of $1.8 million of intangible assets, non-core hydrovac equipment, and inventory equipment that is no longer useable due to product design changes and improvements.

[4] Management stated there were production efficiencies including labor utilization at the Red Deer facility, state-of- the-art production tools/technology updates and strategic relationships with suppliers.

Note: Actual Hydrovacs sold is our own estimate, not confirmed by the Company

The post Tornado Global: Emerging Industry Leader Supplying New Product Line appeared first on First Bridge.

Summary

• Tornado Global Hydrovacs Ltd. is an undervalued leader in the hydrovacs industry, where innovative trucks are used for safe digging in areas with critical underground infrastructure (gas, telecom, water).
• Close to half a trillion dollars in proposed U.S. infrastructure spending is focused on work that’ll require the type of safe excavating that the hydrovacs industry is uniquely focused on.
• Newly opened 68,500 square foot facility in Red Deer, Alberta, triples Tornado’s hydrovac manufacturing capacity from 80 units to 240 units annually in an owned facility, eliminating outsourcing entirely.
• Tornado recently hired President Brett Newton, a hydrovac industry leader and co-founding partner of Rival Hydrovac, which sold 500 hydrovacs into the municipal market in the past five years.
• EBITDA will exceed $8 million in 2022 and reach $15 million by 2023. Share value should approach $1.50 per share as the ability to deliver 240 hydrovacs annually takes shape.

Introduction

On the heels of the Biden Administration’s “American Jobs Plan” and bipartisan negotiations, industries and companies that would benefit from such a major infrastructure initiative are receiving increased attention. Close to half a trillion dollars is focused on work that will require the type of safe excavating that the hydrovacs industry is uniquely focused on.

Executive Summary

An undervalued equity opportunity: Tornado Global Hydrovacs Ltd. (OTC:TRRNF) [TSXV:TGH]

• Newly opened 68,500 square foot facility in Red Deer, Alberta, triples Tornado’s hydrovac manufacturing capacity from 80 units in a former leased facility to now 240 units annually in an owned facility, eliminating outsourcing entirely. New plant is outsourcing all fabrication including paint and welding which will allow increased assembly times and quality control. Could diversify product lines via volumetric mixer or other equipment lines that complement hydrovacs.
  • Well-located facility creates a major parts & services hub with 35-40% EBITDA margins.
• Large U.S. Tornado distributor merged with leading specialty distributor to utilities, doubling North American locations and increasing the reach of Tornado’s product offerings. (Working with U.S. dealer to improve distribution as well as customer experience which will increase sales. Current U.S. distributor is only targeting the Mid-West which is a quarter of the market. Reached an agreement with the Ontario East dealer to set up bricks and mortar sales and service in the GTA which is one of the largest markets in North America. Ontario dealer is also in the process of setting up bricks and mortar in Quebec. Assembling Tornado sales team that will support dealers as well as seek new opportunities.)
• Introduction of the F2 Tempest line (7 yards³ debris, 800 gallons water capacity), an environmentally conscious solution for the high-growth city/utility market (currently working with engineering to make unit as utility and municipal friendly, adding new features not seen on competitors’ vac trucks today.)
• Tornado insiders aligned with shareholders, particularly the largest insider, James Chui, who controls 41% of outstanding shares and purchased at an average price of $0.20 per share.
• Experienced management team led by CEO Bill Rollins and Non-Executive Chairman Guy Nelson. Tornado recently announced the hiring of President and COO Brett Newton, a hydrovac industry leader and co-founding partner of Rival Hydrovac (“Rival”), a competitor to Tornado that sold ~500 hydrovacs into the municipal market in the past five years.
• Based on our projections, EBITDA will exceed $8 million in 2022 and reach $15 million by 2023.
• Even with conservative EBITDA estimates, it’s reasonable for share value to approach $1.50 per share as the ability to deliver 240 hydrovacs annually takes shape with support from the growing and recurring profits of the parts and services business.

“American Jobs Plan” Of the $579 billion in new infrastructure spending that is being proposed by the Biden Administration and bipartisan negotiations, these are the initiatives that have been detailed and would require the type of safe excavating that the hydrovacs industry is uniquely focused on.

• $109 billion: Modernize 20,000 miles of highways, roads, and main streets along with 10,000 small bridges and 10 of the nation’s most “economically significant” bridges.
• $73 billion: Power grid improvements.
• $65 billion: Put hundreds of thousands of people to work laying thousands of miles of transmission lines for affordable, reliable, high-speed broadband to all Americans, including the more than 35 percent of rural Americans who lack broadband at minimally acceptable speeds.
• $55 billion: Upgrade aging water systems (small water, household well and wastewater systems) and eliminate all lead pipes and service lines in our drinking water systems (six to ten million homes still receive drinking water through lead pipes and service lines).
• $47 billion: Weatherproofing, upgrades to coastal infrastructure, severe weather mitigation.
• $21 billion: Environmental projects.
• $16 billion: Cap hundreds of thousands of orphan oil and gas wells and abandoned mines.

Total: $386 billion

The Common Ground Alliance (CGA) and their Data Reporting & Evaluation Committee publishes the only comprehensive accounting and analysis of damages to buried infrastructure in the U.S. and Canada. Six months ago, they released the DIRT Report for 2019, which estimated $30 billion in societal costs in 2019 due to failures to prevent damages in the U.S. alone. Their reporting system also found the root cause of almost 30% of reported damages to be “excavation practices”, often when holes are dug with hand tools and backhoes; striking buried lines and causing a spill or breaking a cable, costly mistakes.

Hydrovacs Industry Overview

The industry has continued to grow throughout Canada and the United States because of the tremendous efficiency and safety it brings to daylighting, soil trenching, piling hole excavation, debris removal and cold-weather digging.

While initially tailored to the oil and gas sector, the hydrovac industry has rapidly expanded into the utility market where damages are common and more efficient solutions are in demand as well.

Estimates are that 1,500 hydrovac trucks are manufactured in North America annually. Key manufacturers include:

Image Source: Company Logos

Manufacturers sell direct and through distributors such as Camex Equipment, Custom Truck One Source (NYSE:CTOS), Transwest Truck and Trailer, JD Brule, and Ditch Witch (subsidiary of The Toro Company (NYSE:TTC)). Contractors, municipalities, and rental groups are the buyers. Large scale operators, most of which purchase from the highlighted manufacturers, include:

Image Source: Company Logos

The largest company in the industry is Badger Infrastructure Solutions Ltd. (OTCPK:BADFF), manufacturing its own trucks for exclusive use and operating a fleet of about 1,200 hydrovacs throughout North America. In 2020, Badger had CAD446 million of revenue in the United States with 962 hydrovacs and CAD113 million of revenue in Canada with 232 hydrovacs (166 of which are operated via franchise agreements).

In what Badger labels “core” and “strategic” markets, where there is a 50-500 and 500-1,500 truck market potential per location, respectively, the company estimates total hydrovac truck count growth potentials of ~5x and ~15x, respectively. In anticipation of such tremendous market potential, Badger intends to significantly increase its manufacturing to add an additional 600 hydrovac trucks to its fleet by the end of 2024. Badger trades at 2.8x 2020 Revenue and 15.7x 2020 EBITDA.

An Undervalued Equity Opportunity

Image Source: Company

Red Deer Manufacturing Capacity Expansion

Prior to the Covid-19 pandemic, Tornado was selling 120 hydrovacs annually, 1/3 of which were outsourced and 2/3 produced in a leased facility operating at full capacity. Demand exceeded its manufacturing capacity so on February 3, 2020, the company purchased a 68,500 square foot facility built on 16 acres of land located in Red Deer, Alberta for $6.5 million. That facility will be operational this summer and allow the company to meet increasing capacity needs without any restrictions. The company will be able to manufacture up to 20 trucks per month (240/year), all from this new facility.

Growth of Tornado’s Parts and Service Business

In 2020, operating out of the leased facility it has now vacated, the company had a $4 million revenue contribution from its parts and services business (ten employees), the highest annual sales on record. In August of 2020, the Red Deer facility started being utilized for this growth under the direction of John Lavoie, an experienced operations manager previously at Clean Harbors. Management estimates that staff could grow 3x-4x in the next three years at this location.

With a team of licensed mechanics (Red Seal, Journeymen), a new 30’x100′ foot parts warehouse and five 110-foot bays, Tornado is in an excellent position to build a major inspection, repair and parts business servicing the Red Deer, Alberta, region. They can focus on medium and heavy-duty vehicles, not only hydrovacs, including major chassis manufacturers that can provide large volumes in parts and service business. Tornado, with its buying power, now becomes a major player in this market. In the new, much larger facility it owns, sales of parts and service are expected to significantly increase in 2021.

Image Source: Company, www.tornadotrucks.com

Leading and Well-Financed Distribution Partner

In April of 2018, Tornado entered a strategic alliance with Custom Truck One Source for the US distribution of Tornado’s products along with parts and services throughout all its locations. Custom Truck is a leading provider of specialized truck and heavy equipment solutions to the utility, rail, infrastructure, and telecommunications markets in North America.

On April 1, 2021, Custom Truck was acquired for $1.475 billion by Nesco Specialty Rentals, another leader in the industry focused significantly on utilities and utility contractors, with an equity investment of $850 million by Platinum Equity (a previous Nesco owner) and $100 million from existing shareholders Blackstone Group, Energy Capital Partners and Capitol Investment. “We believe the new company will be distinctively well-positioned to take advantage of the anticipated growth in critical U.S. infrastructure efforts in energy, telecom and rail over the near term and beyond,” said Mark Ein, Vice Chairman of Nesco Holdings, upon announcement of the deal in December 2020.

“The combined company’s increased scale and national presence will provide significant opportunities to further penetrate new and existing customers across geographies and end-markets serving highly attractive and growing infrastructure end markets, including the transmission and distribution energy grid, the 5G revolution build-out and critical rail and other national infrastructure initiatives.”

The Custom One/Nesco merger has nearly doubled the distribution reach from 26 to 46 company-operated locations. Headquarters remain in Kansas City with Fred Ross as CEO of the combined entity.

Image Source: Company Press Release and https://www.customtruck.com/locations/

Tornado Hydrovacs Growth in the Municipal Market

Introduction of the F2 line (7 yards³ debris, 800 gallons water capacity) for city markets will be a great complement to popular F3, F4 and F5 Eco-Lite lines (10-12 yards³ debris, 1,250-1,950 gallons water). Competitor units range from 6 to 15 yards³ debris bodies with prices ranging from $350,000 to $500,000.

With a concentration of sales in the mid-west U.S., Tornado has plans to expand its product reach with the adding of additional regional hydrovac distributors that have shown great interest in selling the company’s industry leading hydrovacs to the municipal market.

Growth and Value Opportunity Going Forward

Tornado’s Historical Financials: Tornado had been making significant strides into the U.S. market leading up to the Covid-19 pandemic. Revenue in the U.S. more than doubled from 2018 to 2019 and accounted for 55% of total sales. The company weathered the 2020 pandemic with earnings slightly above those of 2018 but naturally our projections expect a return to growth as the U.S. continues its recovery. (Please note that 2017 and 2018 figures include the same amount in revenues and costs for the chassis sold as part of hydrovac units; 2019 figures were restated and show “With Chassis”. From 2020 onward, filings will include only Tornado product sales)

Chart Source: Personally Created in Excel Based on Company Filings

In 2020, we did see Tornado’s highest ever sales figures from Parts and Services, with a $4 million revenue contribution. This is an area of the business that the new Red Deer facility will help continue to grow as its central location and multi-bay facility can be extremely well utilized with all types of trucks requiring parts and services.

Projections and Initial Valuation Views: This year, 2021, will still be a post-Covid-19 transition year, with perhaps H2 2021 reflecting a steady increase of traditional U.S.-destined production at the new facility as a healthy economic recovery demand comes back. Based on direct manufacturing costs in 2019 and overall cost of sales margin improvements with increased revenue at the new facility, we project the following for 2021 through 2023. (2021 and 2022 conservatively assumes $4 million in Parts & Services sales and an increase to $5 million in 2023.)

Chart Source: Personally Created in Excel Based on Personal Projections

Tornado’s Stock Performance

Since going public at the end of June 2016, Tornado has remained below $0.45 a share. Over the past five years the company has fine-tuned its design and manufacturing to produce leading offerings for the North American hydrovacs industry. With the new facility in Red Deer, Alberta, increased manufacturing and service capacity, tremendous projected demand and a major U.S. distribution partner, we think this stock is an opportunity for impressive returns and should approach $1.50 per share.

The company currently trades at 38.3x 2020 EBITDA. Badger Infrastructure Solutions Ltd., a larger cap leader in the industry that we discussed earlier, trades at 15.7x 2020 EBITDA. Based on our projections, we expect EBITDA to consistently increase over the coming quarters and approach $15 million for year-end 2023. Assuming an EBITDA multiple of just 13x for 2023 EBITDA, we would exceed our $1.50 per share expectation based on the valuation specifics discussed.

Image Source: Yahoo! Finance Stock Chart

Experienced Management Team Well-Aligned with Major Shareholders

The company has an experienced management team and board of directors led by CEO Bill Rollins, Non-Executive Chairman Guy Nelson, and the largest shareholder James Chui (41% of common shares). Mr. Chui purchased his equity in 2016 and 2017 at an average price of $0.20 per share. The company recently hired Brett Newton, a hydrovac industry leader. Brett served as Vice President of Operations and Fleet Manager for Badger franchises in Toronto, Hamilton and Niagara, before creating his own hydrovac service operation in Ontario. For the past five years, he has been a co-founding partner of Rival Hydrovac, a competitor to Tornado. Rival sold almost 500 hydrovacs into the municipal market in the past five years.

Along with Mr. Chui’s 52 million shares, Mr. Nelson, Mr. Rollins and Mr. Newton have shares and options for an additional 9 million shares; company insiders combined own close to half of all outstanding shares on a fully diluted basis.

The Parts and Services team is led by John Lavoie, an experienced operator in the hydrovac industry who previously worked at Clean Harbors before coming to Tornado. Since 2016, Rich Konkler has overseen sales in the United States and the partnership with Custom One.

Thinking About Electric

Tornado’s engineers have excelled in making their hydrovac trucks able to carry more payload with lighter manufacturing materials to the benefit of operators. As the electrification of commercial vehicles in North America progresses, Tornado’s engineering expertise and relationships with chassis manufacturers will be a great advantage. Utilizing battery technology with high energy density systems to power components like the blower, water pump and water heater systems on hydrovac trucks will be key if the cost-efficient electrification of future vehicle development becomes an operator preference.

Risks

Future growth is a key part of the share price increase that we project. There are a number of negative events, that if they were to take place, would surely impede the ability for the type of revenue and EBITDA improvement that we have discussed.

• Should bipartisan negotiations around the proposed “American Jobs Plan” fall apart and result in a major reduction of the $386 billion in hydrovac-friendly initiatives, the company would lose revenue opportunities.
• The newly opened manufacturing facility in Red Deer, Alberta, is expected to be able to produce up to 240 units annually. If it is unable to do so, and customers need to shift their orders elsewhere, the company would lose revenue opportunities. This facility is also projected to be a hub for parts and services for the entire region. If customers do not bring their business to the Red Deer facility, the company would lose revenue opportunities.
• The hydrovacs industry is competitive, with multiple companies providing trucks. Mergers between smaller competitors could create economies of scale and market reach that might increase the overall competition faced by the company, above and beyond what it is already dealing with. Badger, the largest company in the industry, might expand its operations even further than already planned and create ongoing pressure.
• Covid-19 had a significant effect on the company’s earnings. If the pandemic returns to peak economic disruption, earnings would once again be significantly affected.
• Lastly, if the electrification of commercial vehicles in North America far exceeds current expectations and municipalities prefer only electrified vehicles, the company will need to integrate production and engineering changes to its vehicles much faster than we have anticipated.

Additional disclosure: Disclaimer
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal, tax advice, or investment matters and readers are advised to consult their own professional advisers. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
First Bridge Investment Group does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any discussion in this document of past or proposed outcomes should not be relied upon as any indication of future outcomes. First Bridge Investment Group does not have any duty to you, whether in contract, tort, under statute or otherwise with respect to or in connection with this publication or the information contained within it. To the fullest extent permitted by law, First Bridge Investment Group disclaims any responsibility to liability to for any loss or damage suffered or cost incurred by you or by any other person arising out of or in connection with you or any other person’s reliance on this publication or on the information contained within it and for any omissions or inaccuracies.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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Since our April 2016 initiating report and our July 2017 follow‑up on Village Farms International (“Village Farms” or “VFF”), the company has transitioned from an overlooked hydroponic greenhouse operator into a vertically integrated participant in the Canadian cannabis market. Pure Sunfarms, the company’s 50%-owned cannabis joint venture, is now licensed across its full 1 million square foot Delta 3 facility, has begun commercial sales, and delivered positive net income for 2018.

Village Farms’ common shares have performed significantly well since our earlier articles, helped by Pure Sunfarms’ progress, the recent Nasdaq listing under ticker “VFF,” and the launch of a U.S. hemp/CBD strategy. At today’s valuation, we believe a substantial portion of our original upside thesis has been recognized by the market. The risk/reward profile is now much more balanced than it was in 2016–2017.

For long-time shareholders who have held through this entire period, we view the current environment as a reasonable opportunity to realize gains, either fully exiting or significantly reducing exposure.

Background: From Undervalued Greenhouse Operator To Cannabis Platform

In April 2016, our first Village Farms article introduced the company as a “rare undervalued equity investment opportunity in the AgTech sector.” At that time, there was no sell-side research coverage on the name. We were, to our knowledge, the first long-form public equity research on Village Farms, even though the company had operated for years as one of North America’s largest producers of greenhouse-grown tomatoes, peppers, and cucumbers.

That initiating report highlighted several key points:

• Village Farms owned and operated 240+ acres of greenhouse capacity, with additional acreage accessed via distribution agreements, supplying major North American grocers.

• The company had developed proprietary GATES greenhouse technology, enabling high yields and materially lower water usage compared to field growers, an increasingly valuable attribute in a world of water scarcity and food safety concerns.

• Despite these strategic assets, the stock traded at a discount to the replacement value of its greenhouse footprint and at a modest multiple of normalized earnings, with limited investor attention.

Our July 20, 2017, follow‑up article focused on the newly announced Pure Sunfarms joint venture with Emerald Health, a 50/50 cannabis JV that would repurpose existing greenhouse capacity in Delta, British Columbia. That second report argued that:

• Village Farms’ greenhouse infrastructure, operational team, and retailer relationships provided a durable advantage in cultivating cannabis at scale.

• The JV structure offered a low-risk, high-optionality way for Village Farms to participate in the Canadian adult-use cannabis opportunity while preserving its core produce business.

• The public market was not yet appropriately valuing the potential earnings contribution from the Delta 3 conversion as the cannabis platform matured.

At that point, Village Farms still remained essentially uncovered by traditional equity research firms. Today, by contrast, the company is followed by multiple Canadian and U.S. analysts, underscoring how far the story has moved.

Developments Since Our July 2017 Cannabis Report

Pure Sunfarms’ progress over the last 18–20 months has moved much of the “option value” we highlighted in 2017 into the realm of realized economics.

Pure Sunfarms licensing and profitability

According to Village Farms’ fourth quarter and full-year 2018 results:

• Village Farms’ share of Pure Sunfarms’ net income in 2018 was US$2.4 million, including US$2.8 million in the fourth quarter alone.

• Pure Sunfarms generated positive net income in its first full quarter of sales and was profitable for the full year.

• Health Canada license amendments have allowed Pure Sunfarms to expand its licensed production area to the entire 1 million square foot Delta 3 greenhouse.

These facts validate core elements of our 2017 thesis: the Delta 3 asset could be converted efficiently for cannabis production, and Village Farms’ long experience with greenhouse operations translates into competitive performance in a new, higher-value crop.

Commercial channels and non-dilutive financing

Pure Sunfarms has also moved beyond “just production” into commercially relevant channels:

• It has been selected by the Ontario Cannabis Store, Canada’s largest provincial distributor, to supply branded products into the recreational market.

• It has entered into a wholesale arrangement with a major online medical cannabis platform, providing additional volume outlets and brand visibility.

• A CAD$20 million term loan with Bank of Montreal and Farm Credit Canada helps complete the Delta 3 conversion and supports general corporate purposes, providing non-dilutive growth capital for the JV.

Together, these steps reinforce that Pure Sunfarms is not merely a licensed facility, but an operating business with profitable production, distribution, and financing in place.

Capital markets upgrade: Nasdaq listing

Village Farms has also recently materially improved its capital markets profile. In February 2019, the company’s common shares began trading on the Nasdaq Capital Market under the symbol “VFF,” while continuing to trade on the Toronto Stock Exchange.

A U.S. national exchange listing typically broadens the eligible shareholder base (particularly among U.S. institutions and funds that cannot own OTC names), enhances liquidity, and can support a higher valuation multiple when fundamentals are perceived as solid. We believe this listing has been an important catalyst in the recent share price performance.

Emerging U.S. hemp/CBD optionality

The December 2018 U.S. Farm Bill legalized hemp cultivation and hemp-derived products at the federal level. Village Farms moved quickly to capitalize on this development:

• It formed a 65%-owned joint venture, Village Fields Hemp, with the Jennings Group to pursue outdoor hemp cultivation and CBD extraction in multiple U.S. states.

• Management has articulated an intent to build a vertically integrated hemp-derived CBD business, leveraging Village Farms’ existing relationships with large retailers and, over time, its greenhouse footprint in Texas as regulations allow.

While still currently in its early stages, this U.S. hemp/CBD strategy represents a second layer of optionality on top of Pure Sunfarms and stands in sharp contrast to the company’s situation when we first initiated coverage as an almost completely ignored greenhouse grower.

Share Price Performance And The Evolution Of Coverage

The share price performance of Village Farms over the past several years has been dramatic since we initiated coverage:

• A gain of more than 500% in 2017, driven by investor enthusiasm around the cannabis JV and the broader Canadian cannabis bull market.

• A sharp pullback in 2018, with the stock declining roughly 40–50% from its peak, as cannabis stocks corrected and the produce business faced margin pressure.

• A strong rebound in early 2019, with shares nearly doubling off the late-2018 lows, aided by Pure Sunfarms’ profitability, licensing progress, and the Nasdaq listing.

For readers who have followed our work since the April 2016 initiating report and the July 2017 cannabis update, this translates into a multi-bagger outcome from the $1.14/share (market cap of $44 million) at our first report and $1.53/share (market cap of $60 million) at our second report to current levels several times higher, even after periods of volatility.

Equally noteworthy is the evolution of research coverage around the name. When we published our first Village Farms report in 2016, there was no formal sell-side research, and the stock was effectively ignored by institutional investors. Now, multiple Canadian and U.S. firms publish research on Village Farms. We believe our early work helped frame the investment case for a business that was, at the time, almost entirely overlooked.

The contrast is clear: what began as a small-cap, under-followed greenhouse grower trading below the value of its assets has become a more widely followed operator with a meaningful institutional shareholder base.

Reassessing Risk And Reward At Current Levels

With the share price now reflecting much of the good news, we believe it is appropriate to revisit the risk/reward trade-off for new capital and for long-time shareholders.

The market has now broadly recognized
• The existence of Pure Sunfarms as a profitable, scaled producer of cannabis.

• Licensing of the full Delta 3 footprint, with the potential to generate significant production volumes.

• Early evidence that Village Farms’ greenhouse expertise translates into competitive economics in cannabis.

• Strengthened balance sheet support for the cannabis project via non-dilutive bank financing.

• The capital markets uplift associated with a Nasdaq listing and broader investor awareness.

What remains as upside optionality
The remaining upside now lies more squarely in execution and expansion. Key areas of residual upside include:

• Full utilization of the Delta 3 facility at targeted yield and cost metrics, and the potential for expanded capacity beyond Delta 3 over time.

• The possibility, depending on future decisions and JV dynamics, for Village Farms to increase its economic interest in Pure Sunfarms.

• Successful execution of the U.S. hemp/CBD strategy, including regulatory clarity in key states, the scaling of cultivation and extraction, and commercialization of branded or private-label products through large retail partners.

Key risks from here
Against this, we see several risks that are more consequential at today’s higher valuation:

• Cannabis wholesale pricing pressure as more licensed capacity comes online across Canada, potentially compressing margins for even efficient producers like Pure Sunfarms.

• Regulatory or execution challenges in both cannabis and hemp, including delays in permitting, testing, or product approvals.

• Persistent margin compression or volatility in the core produce business, which could continue to weigh on consolidated results.

• The possibility that investor sentiment toward cannabis broadly becomes more cyclical, leading to greater volatility in Village Farms’ share price than would be justified by fundamentals alone.

In 2016 and 2017, the asymmetry was heavily skewed in favor of the long side: a solid, asset-rich business with limited coverage and a free or nearly free option on cannabis. Now, the easy money has likely been made. The setup now appears more balanced, with both genuine long-term upside and a more meaningful set of risks to future returns.

Implications For Long-Term Shareholders

For investors who have held Village Farms since our initiating report in April 2016 or at least since our July 2017 article, the investment has, despite volatility, likely generated substantial gains.

We see three practical approaches for long-time shareholders:

Harvest and redeploy
For those whose original thesis centered on the market eventually recognizing the value of Village Farms’ assets and cannabis optionality, that outcome has largely occurred. From this vantage point, it is reasonable to treat Village Farms as a successful case study in value realization and to reallocate capital to the next mispriced opportunity where we can again be early rather than late in the discovery process.

Scale back, keep a residual position
A second approach would be to realize a majority of gains while maintaining a smaller position to participate in any further upside from Pure Sunfarms’ growth or the U.S. hemp/CBD strategy. This balances participation in long-term growth with a more conservative risk posture, recognizing that the valuation now embeds a substantial amount of optimism.

Remain fully invested, with adjusted expectations
More aggressive shareholders may choose to stay fully invested, viewing Village Farms as an evolving cannabis and hemp platform with a defensible produce base and unique greenhouse assets. For this camp, we would simply emphasize that forward returns are unlikely to resemble the past three years, and that position sizing and risk management become more important at current levels.

Our own inclination, leans toward the first two paths. For long-time shareholders, this is a rational window to exit profitably or at least substantially de-risk the position, while still recognizing Village Farms as a legitimate long-term platform in cannabis and hemp.

Final Thoughts

Village Farms’ journey over the last several years illustrates several broader points about public-market investing in under-followed names.

High-quality, asset-backed businesses can remain undervalued for extended periods until a visible catalyst, in this case, cannabis and hemp, forces investors to revisit the narrative. Deep operational expertise and existing infrastructure can be reused to participate in adjacent growth markets, often at a fraction of the cost and risk of greenfield entrants. When the market finally embraces a story, the valuation can move quickly from “cheap” to “fully valued or higher,” particularly in sectors that attract momentum and retail enthusiasm.

From our standpoint, Village Farms has largely executed on the strategy we outlined in 2016 and 2017: leveraging its greenhouse platform to participate in high-growth categories while maintaining its core produce franchise. The recent financial results, Pure Sunfarms’ profitability, and the Nasdaq listing collectively validate that effort. The flip side of that success is that the simple, deeply contrarian angle that originally attracted us is no longer present.

We also note with some satisfaction that when we first wrote about Village Farms in 2016, there was no formal research coverage, and very few investors were paying attention. Today (as of March 15, 2019) the company is followed by multiple analysts and a growing base of institutional shareholders. That shift in attention and understanding is exactly what long-term, research-driven investing seeks to capture.

For investors who joined the story early, we believe today’s environment represents a sensible moment to acknowledge that the core thesis has largely played out, and to consider locking in what has become a very profitable outcome.

Disclaimer
This article is for informational purposes only and reflects our views as of March 15, 2019, based on publicly available information. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal, tax advice, or investment matters and readers are advised to consult their own professional advisers. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

First Bridge Investment Group does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any discussion in this document of past or proposed outcomes should not be relied upon as any indication of future outcomes. First Bridge Investment Group does not have any duty to you, whether in contract, tort, under statute or otherwise with respect to or in connection with this publication or the information contained within it. To the fullest extent permitted by law, First Bridge Investment Group disclaims any responsibility to liability to for any loss or damage suffered or cost incurred by you or by any other person arising out of or in connection with you or any other person’s reliance on this publication or on the information contained within it and for any omissions or inaccuracies.

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The Company’s products are in line with consumer trends and the eating habits of developed economies like Canada and the US that continue to seek out a sustainable, resource-efficient approach to provide high-quality produce. Village Farms provides “local produce” to its retail customers from “farm to table in about three days or less.” Growing indoors in soil-less systems inherently limits exposure to many soil-borne pathogens that may have caused E. coli or salmonella. The safety standards and ability to trace produce through the supply chain are also hard for field growers to replicate, especially smaller suppliers. Such features should lead to continued growth in the retail produce market and penetration of the food service industry, where companies like Chipotle (CMG) provide examples of field grown problems. Expect food service providers to look to hydroponically grown produce like the retail grocery market has done.

^{Source: Village Farms – excludes Costco and BJ’s which are 100% Greenhouse retailers.}

Proprietary Technology

The Company developed a proprietary greenhouse technology known as Greenhouse Advanced Technology Expert System (GATES) for growing produce in extreme conditions. At its Permian Basin Facility in Monahans, Texas, the Company is growing in an area where temperatures can get as high as 117 degrees F in the summer while winter months bring snow and harsh rains. This semi-closed greenhouse is a part of the strategy to build facilities that can produce quality hydroponic produce in harsh conditions.

“Village Farms made a $45 million investment in the Monahans Permian Basin facility,” said the Company’s CEO and Co-Founder, Michael DeGiglio, “and it’s continuing on this strategy platform into the future. This first commercial ‘Gates’ facility is 30 acres, and is also where the ‘Gates’ research center is located.” The company is continuing its research to advance its technology for use in future years and in many areas – even possibly extending to offshore countries. “Gates” technology’s more enclosed atmosphere enables Village Farms to better control the airflow and climate. It maximizes beneficial insect populations through the use of integrated pest management, IPM; a far more sustainable alternative to the use of chemical pesticides. It also enables the company to produce hydroponically in more severe climates. In the future, such technological developments for increasing yields in even the harshest environments could be licensed to other growing facilities.

Financial Information

On May 28, 2012, the Company’s 82-acre facility in Marfa, Texas, saw greenhouses partially or completely destroyed by a “once in a hundred years” hail storm. After a record year of profitability in 2011, the Company’s production capabilities took a hit due to the storm just as its Monahans facility was coming online. By the end of June in 2014, the Company was harvesting 60 of the 82 acres that had been destroyed – 20 acres continue to be on hold.

A timeline of total acres in production may be helpful in reviewing historical revenues and projecting 2016:

 

2015 was the first full year for VF back at close to pre-hail capabilities with the added technological efficiencies (GATES) that have since been incorporated at the Monahans facility. The Company has also continued to increase its own production of exclusive varieties like its Mini San Marzanos, as well as expand the production of these exclusive varieties with its supply partners. As a result of the outlook for such exclusive varieties, the Company was able to enter into a new distribution agreement with Kingsville, Ontario, grower Great Northern Hydroponics, a subsidiary of Detroit-based, Soave Enterprises. The effect should be extremely positive for 2016 as the benefits to earnings can already be seen in the recent 2015 annual filings. Great Northern will ramp up from 15 acres of winter production to 60+ acres in April – the increased capacity should have a significant effect on revenue and EBITDA.

 

Village Farms is Significantly Undervalued

In reviewing the Company’s balance sheet, you will find two significant highlights:

1) The discrepancy between the Company’s book value and market value of equity

2) The apparently low book value attributed to the 240 acres of greenhouse the company owns

Undervalued Share Price

Over the past nine months, Village Farms had been trading at $0.60-0.70 USD per share with a market capitalization of $23.3-27.2 million USD based on 38.807 million shares outstanding.

On March 16, 2016, Mastronardi Investment Holdings purchased approximately 20% of outstanding shares at $0.96 USD per share, a 33% premium to the trading price; along with a positive earnings release for 2015 distributed at the end of last month, the stock is now trading at $1.14 USD per share as of April 4, 2016.

Book value on equity is $62.931 million USD, implying a book value share price of $1.62 USD. Village Farms is currently trading at just 0.7x its book value.

Low Book Value for Greenhouse Acreage

As of Q4 2015, the net book value for physical holdings is $94.285 million. For Village Farms’ 240 acres of greenhouses, this implies a book value of $0.393 million per acre. Considering that the 30-acre Monahans facility reportedly involved an investment of $45 million, the remaining adjusted per acre book value would be $0.235 million. This number seems to severely undervalue the holdings when comparing it to industry data points pertaining to the costs of greenhouse acreage.

Even a slightly higher per acre value would support significant value corrections as outlined below:

 

Validation of Potential Growth Plans Based on Significant Additions to the Team

The Company is led and was founded by Michael DeGiglio, a 30-year veteran of the industry with deep agricultural experience in controlled environment growing. The CFO of the Company, Stephen Ruffini, joined over seven years ago in 2009 and has over two and a half decades of experience in finance, operations, investor relations and M&A. Doug Kling, Chief Marketing Officer, and Bret Wiley, SVP of Sales, both have over 30 years of extensive sales, retail and marketing experience. It’s a strong management team at a company that is known as a leader in the industry with sought-after innovations in growing produce; experienced growers have allowed Village Farms to successfully enter new regions.

January 4, 2016: Dr. Roberta Cook accepted a position on the board of directors of Village Farms. Dr. Cook is a Cooperative Marketing Strategist at the Department of Agricultural & Resource Economics at UC Davis. She is a respected agricultural economist with extensive industry, market and trade knowledge. In response to her board appointment she commented that “Greenhouse vegetables are on target with consumer trends and are gaining a higher share of the ‘consumer stomach.'”

November 2, 2015: The Company created a new role, Director of Strategic Business & Sales Development, for Lyra Vance, a 14-year industry veteran with positions at The Oppenheimer Group (Oppy) and Transfresh Corporation. Oppy delivers over 100 varieties of produce from more than 25 countries – in North America, Oppy is particularly focused on greenhouse produce and berries. Transfresh, is interestingly an expert in “ensuring the quality and marketability of fresh berry products.”

It should be noted that berries represent the largest dollar contribution in retail produce and that the CEO of Village Farms mentioned during the Q3 2015 earnings call that Village Farms may eventually expand into the berry market, a high-growth and high-value segment.

Significant increases in population growth combined with a decreasing amount of clean water and available land is leading to predictions of a global food crisis that would have far reaching effects. For most, technological advances in food production will be the only way to meet the unsustainable projected increase in food demand.

Food and agribusiness have a massive economic, social, and environmental footprint – the $5 trillion industry represents 10 percent of global consumer spending, 40 percent of employment, and 30 percent of greenhouse gas emissions (a 75% increase since 1990). Although sizable productivity improvements over the past 50 years have enabled an abundant food supply in many parts of the world, feeding the global population has reemerged as a critical issue.

If current trends continue, by 2050, the world will need to feed more than nine billion people, meaning that food production will need to increase by 70 percent, and crop demand for human consumption and animal feed will increase by at least 100 percent. At the same time, more resource constraints will emerge: 40 percent of water demand in 2030 is unlikely to be met and already, more than 20 percent of arable land is degraded – just 3% of the Earth’s total surface is arable land.

Depletion of natural resources, the impact of climate volatility on crops, and declining productivity gains in agriculture are expected to hinder growth in the world food supply, forcing countries to produce more with less. The pressure on water, land, energy, and labor resources will necessitate innovation to enhance agriculture productivity.

 

“The choice is clear,” says Hans Herren, World Food Prize laureate and the director of Biovision, a Swiss nonprofit.

“We need a farming system that is much more mindful of the landscape and ecological resources. We need to change the paradigm of the green revolution. Heavy-input agriculture has no future-we need something different.”

There are ways to deter pests and increase yields, he thinks, that are more suitable for the farmers of this world. Yes, indeed there is, perhaps none better suited to meet such important changes than hydroponic greenhouse farming. Village Farms is an undeniable value investment.

Aligned with Market Trends

– The projected disparity in resources to meet food and water demand in the near future requires agricultural tech (AgTech) solutions; with limited opportunities for investment in companies hydroponically growing food, VF provides a rare opportunity in this sought-after segment.

– Hydroponically grown non-GMO food is increasingly preferred by consumers; retail grocery market share will continue to rise and the food service industry holds major growth potential.

– Village Farms is a well-managed vertically-integrated operation that stands out in an industry that could start consolidating; reinforced by market signals from within the industry such as board additions (Dr. Roberta Cook, one of the industry’s foremost experts), new manager migrations (Lyra Vance from Oppy) and exclusive distribution agreements (Great Northern considered a premier Leamington area grower and previously with Mastronardi).

Acknowledgment from Market Experts of the Existing Value Opportunity

– On March 16, 2016, Mastronardi Holdings announced that it was purchasing approximately 20% of outstanding shares at $1.25 CAD/$0.96 USD; a 33% premium to Village Farms’ existing share price. Mastronardi’s purchase for “investment purposes” supports the undervalued analysis.

Increasing Revenue and a Target Share Price that Properly Values the Business

– For the next nine months of 2016 and looking ahead to 2017 and 2018, the Company is at maximum acreage along with increased efficiency at Monahans via GATES, has a major distribution agreement with Great Northern that allows for sales in new markets and has the capabilities to support additional businesses such as berries or additional high-margin crops.

– Based on the recently released annual figures for 2015 that saw revenue rise to $141.9 million and EBITDA increase by 18%, revenue for 2016 is projected to be $165 million with EBITDA approaching $12.5 million USD. This 16% growth in revenue assumes continued profit contributions from Great North distribution, as was seen to start materializing in the fourth quarter of 2015 per the latest filings. Growth should continue into 2017 for revenues of $190 million and EBITDA of $15.5 million.

– In line with its continued growth potential and market-leading operations, Village Farms should be trading close to $3.50 in two years as it releases its 2017 Annual Report. Along with an increase in earnings per share this takes into account an increased per acre book value compared to the current undervalued adjusted acreage rate of $0.235 per acre.

Supporting Documents

1. Village_Farms__A_Rare_Undervalued_Equity_in_the_Ag…

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal, tax advice, or investment matters and readers are advised to consult their own professional advisers. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
First Bridge Investment Group does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Any discussion in this document of past or proposed outcomes should not be relied upon as any indication of future outcomes. First Bridge Investment Group does not have any duty to you, whether in contract, tort, under statute or otherwise with respect to or in connection with this publication or the information contained within it. To the fullest extent permitted by law, First Bridge Investment Group disclaims any responsibility to liability to for any loss or damage suffered or cost incurred by you or by any other person arising out of or in connection with you or any other person’s reliance on this publication or on the information contained within it and for any omissions or inaccuracies.

Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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