Organigram is trading at a 50 per cent discount to its peers, GMP says

Cannabis company Organigram Holdings (Organigram Stock Quote, Chart TSXV:OGI) delivered its fourth quarter financials last Friday, coming in with revenue of $3.2 million and an Adjusted EBITDA of negative $1.7 million. The results were slightly below expectations, says Martin Landry of GMP Securities, but the company’s ultra-low production costs demand investor’s attention and put the stock on GMP’s “Best Ideas” list.

Moncton, New Brunswick’s Organigram has a fiscal year end and fourth quarter that ended August 31, 2018, and thus, the results do not include any data stemming from the legal rec marijuana period which began on October 17. For the fiscal year, the company’s net sales grew by 131 per cent to $12.4 million, while its registered patient list increased 112 per cent to 15,730.

“We are pleased with our progress to date and believe that we have performed well in a highly competitive space while always maintaining a sustainable cost structure,” said CEO Greg Engel in a press release. “Ultimately, it is our view that our Moncton Campus will be seen as a crown jewel in the industry as it is able to produce consistent, high-quality indoor grown product at scale to support our brands with the lowest dried flower cultivation costs reported to date in Canada.”

Landry sees a number of contributing positives, the first being the company’s low production costs, which feature cash cultivation costs — $0.62 per gram in Q4, down from last quarter’s $0.66 per gram — among the lowest of licensed producers covered by GMP. New Brunswick’s cheaper labour, energy and occupancy costs are part of the equation, with Landry claiming that gross margins nearing 70 per cent are in the cards for OGI.

“OGI’s shares trades at a 50 per cent discount to senior LPs, providing investors with a good entry point, in our view,” Landry said in a research update on Monday. “Our target is derived from a DCF using: (1) a discount rate of 9 per cent; (2) a 7 per cent share of the Canadian recreational market; (3) average EBITDA margin of 28 per cent (26 per cent previously); and (4) terminal growth of 3 per cent.”

Landry also likes Organigram’s discipline on SG&A, where the company reported Q4 SG&A of $3.9 million, up only slightly from the previous quarter.

“OGI’s low production costs should cycle through its COGS starting in Q1/FY19 and lead to material margin expansion. In addition, the company has wide distribution reach supplying nine provinces, with Quebec being a target for 2019. Finally, OGI is on track to have a sizeable production footprint in excess of 100 tonnes by H2/CY19,” Landry says.

The analyst is maintaining his “Buy” rating and target price of $8.50, representing a projected return of 74.2 per cent at the time of publication.