Organigram has 66 per cent upside, GMP Securities says

Following the company’s third quarter results, GMP Securities analyst Martin Landry is still bullish about Organigram (TSXV:OGI).

On Monday, Organigram reported its Q3, 2018 results. The company earned $2.82-million on sales of $3.71-million. Highlights of the quarter included the launch of its adult recreational brand strategy, the receipt of a licence for controlled drugs and substances from Health Canada making the company a licensed dealer, and the commencement of harvesting at its phase two expansion facility.

Landry notes that OGI is now reporting industry-leading harvest costs.

“Organigram’s production costs (harvest) came in at $0.80/gram in Q3, down an impressive 45% sequentially and representing one of the industry’s lowest production costs,” he says. “The improvement has been driven by a growth in yields, which increased from 71 grams to 93 grams per plant. These better production results are already starting to show up in the company’s gross margin line, and we expect they will continue to drive better profitability in the coming quarters.”

In a research update to clients today, Landry maintained his “Buy” rating but increased his one-year price target on Organigram from $7.00 to $8.00, implying a return of 66.3 per cent at the time of publication.

The analyst thinks OGI will generate EBITDA of negative $2.9-million on revenue of $13.4-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $42.5-million on a topline of $142.8-million the following year.

Landry today explained the reasoning behind his target raise.

“Organigram’s Q3FY18 adjusted gross margin of 78% was impressive and the highest in the company’s history. We expect further improvement based on the company’s harvest costs, which came in at $0.80 in Q3, a leading figure amongst publicly traded LPs. Based on the above we are increasing our long-term profitability assumptions for OGI, driving the increase in our target price. At a discount of 50% to senior LPs, we find OGI’s valuation attractive. OGI is on GMP’s Best Ideas list. Our target is derived from a DCF using: (1) a discount rate of 9%, (2) a 7% share of the Canadian recreational market, (3) average EBITDA margin of 28% (26% previously), and (4) terminal growth of 3%.”