OrganiGram is still undervalued, GMP says

A large inventory write-off for OrganiGram (OrganiGram Stock Quote, Chart, News: TSXV:OGI) is shaking GMP Securities analyst Martin Landry’s faith in the long term viability of the cannabis player.

On Friday, OrganiGram reported its Q3, 2017 results. The company lost $2.34-million on revenue of $1.92-million, a 6.1 per cent increase over the $1.81-million the company posted in the same period a year prior.

“Our No. 1 priority in Q3 was ensuring that product quality and safety remain a stated objective of Organigram,” said CEO Greg Engel. “Through the implementation of a Tier 1 quality assurance program and improved production techniques, the company will ensure that only the finest-quality product is sold to clients of Organigram. We are confident that these actions result in Organigram being well poised for future success. Our facility is among the best across Canada; and with our geographical-based cost advantages and improved product quality, I am very optimistic about the ability of the company to maximize stakeholder value going forward.”

Landry notes that although OrganiGram’s revenue fell below his expectation of $2.6-million, primarily due to non-recurring inventory write-off which reduced product availability during the quarter. Long term, however, the analyst isn’t worried about the company’s ability to deliver superior results.

“We view the Q3 production issues which lead to the inventory write-off as transitory in nature as the company streamlined its genetics to filter out low quality strains which were problematic,” Landry says. “With a stabilized, high-quality product line which could garner higher pricing, combined with continuing good brand recognition (patient count up 25% QoQ in Q3), we hope the likelihood of future crop failures has been reduced. OGI had solid 36% QoQ growth for oil in Q3 pointing to good consumer traction for these products. This combined with the large capacity of OGI’s new industrial extraction equipment (operational in August) could eventually translate into margin improvement. Lastly, while not overly concerning, we note OGI slightly delayed the expected completion date for its Phase II expansion to the end of December 2017 from October previously.”

In a research update to clients today, Landry maintained his “Buy” rating and one-year price target of $4.00 on OrganiGram, implying a return of 65.3 per cent at the time of publication.

Landry thinks OrganiGram will generate EBITDA of negative $600,000 on revenue of $8.9-million in fiscal 2017. He expects those numbers will improve to EBITDA of positive $10.7-million on a topline of $36.8-million the following year.