OrganiGram is a buy, Canaccord Genuity says

OrganiGram Holdings’ (TSXV:OGI) newly announced acquisition of part ownership in a German cannabis company is a good play in terms of diversification, says Matt Bottomley, analyst for Canaccord Genuity, who in a research update on Tuesday reiterated his “Speculative Buy” rating and $5.50 target price.

Yesterday, Moncton, New Brunswick-based OrganiGram announced that it had entered into a non-binding term sheet to acquire up to 25 per cent of alpha-cannabis Pharma GmbH, which produces and markets pharmaceutical cannabinoids and is planning on launching a CBD kit to over 20,000 pharmacies in Germany. The roughly $3.9-million minority position deal, which will see Organigram supplying alpha-cannabis Pharma with cannabis flower for extract, is the company’s first significant foray on the international market.

“We are proud to have developed a world-class indoor facility producing Canada’s premier medical cannabis which is now ready to help support the global cannabis market,” said Greg Engel, OrganiGram CEO, in a press release. “As we expand into international market development and technology acquisition, we are pleased to announce our proposed investment in Alpha-Cannabis Germany, the first of what we anticipate will be several international business development announcements.”

Bottomley notes that Germany’s newly opened up cannabis industry (Germany legalized medical marijuana in March of 2017) has the potential to be twice the size of Canada’s, with a number of Canada’s licensed producers now striking up supply agreements.

“Although a fairly modest investment to start, [OrganiGram] anticipates that it will continue to make additional international inroads and announcements (with other opportunities currently in the mix) after implementing its international division earlier this year,” the analyst says. “As we believe the acceptance of cannabis (particularly for medical purposes) is undergoing a cultural shift around the globe, obtaining exposure to growing markets, such as Germany, provides diversification out of the Canadian market, in addition to adding potential valuable optionality by securing exposure to markets that are primed for growth in the coming years.”

Bottomley views OrganiGram to be trading at ~7.1x its two-year forward EV/EBITDA, which represents a discount to its comparable peer group at 10.1x.

“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,” says the analyst.

Bottomley sees OrganiGram producing revenue and Adj. EBITDA in 2018 of $27 million and $7.5 million, respectively, and revenue and Adj. EBITDA in 2019 of $140 million and $56.4 million, respectively.

Bottomley’s $5.50 target price represents a projected return on investment of 26.4 per cent.