OrganiGram is cheap compared to its pot peers

With one of the lowest valuations among its cannabis peers, Moncton, New Brunswick’s OrganiGram Holdings (OrganiGram Stock Quote, Chart, News: TSXV:OGI) should be a good pick up, says Matt Bottomley, analyst for Canaccord Genuity, who on Tuesday reiterated his “Speculative Buy” recommendation and $5.50 price target.

On Tuesday, OrganiGram released its financial results for the three- and six-month periods ended February 28, 2018, posting gross sales of $3.2 million, an increase of 123 per cent over its fiscal second quarter of 2017.

“We are incredibly proud of what we have achieved in Q2 as we registered record sales and a profit for the quarter,” said CEO Greg Engel in a press release, “but we have also significantly bolstered our balance sheet and from an operational and sales and marketing perspective we are well positioned to take full advantage of not only the medical market but also the burgeoning adult recreational and international opportunities as well.”

Bottomley says that the company’s FQ2 results came generally in line with his expectations and he notes that the company saw significant improvement in its production yields, going from a direct cash cost of approximately $1.85 per gram of cannabis produced in the previous quarter to approximately $1.05 per gram, one of the lowest cost bases among Canada’s indoor producers.

“During the quarter, the company completed its Phase 2 expansion, bringing its total capacity to 22,000 kg, which should be in full harvest in the coming month. Assuming wholesale pricing of ~$5.00 per gram, we believe Organigram currently has the existing infrastructure in place (before consideration its Phase 3 expansion set for completion in June) to support a top line of >$100 million once recreational demand comes on line,” says the analyst in a client update.

Based on the company’s progress, Bottomley predicts that by FQ3, OGI is likely to become EBITDA positive. Nevertheless, the analyst has lowered his estimates for 2018 based on the later projected start date for Canada’s recreational cannabis market (expected by late summer).

Bottomley thinks OGI will produce revenue and Adj. EBITDA in 2018 of $27 million (down from $33 million) and $7.5 million (down from $11.1 million), respectively. In 2019, he estimates revenue and Adj. EBITDA of $140 million (up from $137 million) and $52 million (up from $50.7 million), respectively.

“OrganiGram currently trades at ~6.2x its two-year fwd EV/EBITDA, which is one of the lowest relative valuations in our Canadian cannabis coverage, and a discount to its most comparable peers at 10.6x,” says the analyst. “Based on its attractive relative valuation, low-cost production, geographic location, and expanding footprint, we would continue to be buyers of OGI at current levels.”

Bottomley’s $5.50 price target represents a projected return on investment of 40.0 per cent at the time of publication.