Organigram is undervalued, PI Financial says

Cannabis licensed producer Organigram Holdings (Organigram Holdings Stock Quote, Chart TSXV:OGI) produced its strongest quarter yet, says Jason Zandberg of PI Financial, who in an earnings update to clients Monday reiterated his “Buy” rating and $12.00 target.

Moncton, New Brunswick’s Organigram reported its second quarter fiscal 2019 results on Monday, which featured record net revenue of $26.9 million and Adjusted EBITDA of $13.3 million. CEO Greg Engel says that the numbers speak for themselves about the company’s success.

“For the second consecutive quarter, our results reflected operational excellence which translated into record revenue for the Company, industry-leading adjusted gross margin, and positive adjusted EBITDA, all of which differentiates us from most of the Canadian industry today,” writes Engel in a press release.

“Our team has already progressed several key initiatives in preparation for the derivative and edibles launch in the fall of 2019. We are excited about the significant growth ahead expected from these new products, our expanding capacity, our strategic partnerships, and our relentless focus on continuous improvement to consistently deliver high quality product to our customers,” he says.

Zandberg says that OGI’s top and bottom line numbers beat his estimates, which were calling for revenue and EBITDA of $23.8 million and $7.8 million, respectively.

The analyst says that while Organigram’s cultivation costs increased from $0.74 per gram in Q1 to $0.85 per gram in Q2, they’re still the lowest production costs among Canadian LPs, while its positive EBITDA over the last three quarters is also uncommon in the industry, he maintains.

“OGI’s Q2 2019 revenue ranked third among Canadian LP’s and its cost per gram to produce is the lowest in Canada. OGI recently secured a supply agreement with the SQDC in February 2019, making OGI one of only three LP’s to be in all provinces, with the first shipments to be made in May 2019. We continue to believe that OGI should be among the top five or better given these results but in fact OGI ranks seventh among the Canadian LPs by market cap,” he says.

Zandberg has upped his forecasts, now calling for sales of $113.0 million and $268.0 million in fiscal 2019 and 2020 (previously $111.7 million and $267.6 million) and EBITDA of $43.4 million and $86.6 million in fiscal 2019 and 2020 (previously $37.0 million and $86.4 million). His $12.00 target represents a projected 12-month return of 42.2 per cent at the time of publication.