Organigram is ready for a breakout, Beacon says

Beacon Securities analyst Russell Stanley continues to be bullish on Organigram Holdings (Organigram Holdings Stock Quote, Chart News TSX:OGI), saying that the Moncton, New Brunswick, cannabis company looks ready for a breakout.

On Monday, Organigram reported that it had received Health Canada approval for the licensing of 17 more cultivation rooms, representing about 15,000 kg of increased production in their first year. The company says its Moncton facility now has an annualized capacity to target of 76,000 kg.

“Once again, we are pleased to receive licensing approval consistent with our expectations and the streamlined process we have experienced to date. Our Phase 4 facility expansion remains on schedule to meet growing demand and further contribute to efficiencies of scale,” said CEO Greg Engel in a press release.

Stanley says he is taking the news as a positive for the stock as it “demonstrates continued execution against the company’s expansion plan, setting the stage for significant revenue/EBITDA growth in fiscal 2020,” he writes in an update to clients on Monday.

“While margins dipped to 31 per cent last quarter, they are still amongst the highest in the industry, and our forecast calls for margins to improve to 50 per cent in F2020…”

The analyst says OGI’s strong cash flow needs attention as it’s a rarity in the fledgling cannabis sector where working capital investments, including inventory and biological assets, are a given. In its last reported quarter, for example, Organigram reported $3.0 million in cash from operations, a mark that Stanley attributes to the company’s leading EBITDA margins.

“While margins dipped to 31 per cent last quarter, they are still amongst the highest in the industry, and our forecast calls for margins to improve to 50 per cent in F2020. We believe those levels are very attainable, given that margins reached 55 per cent in Q1/19,” he writes.

Stanley contends that at a valuation of 10x his calendar 2020 EBITDA estimate, OGI is currently trading at a 36-per-cent discount to its broader peer group and a 57-per-cent discount to its peers with a market capitalization of $1 billion and over.

Going forward, the analyst sees catalysts for the stock to include expansion progress updates and the company’s fourth quarter fiscal 2019 financials due in November. He is calling for fiscal 2019 revenue and adjusted EBITDA of $90.1 million and $36.3 million, respectively, and fiscal 2020 revenue and EBITDA of $219.5 million and $109.5 million, respectively.

Stanley thinks that the road ahead for the stock is looking better.

“The technical picture is looking increasingly attractive. The stock has rallied, and is now positioned for a potential break of the downtrend that began in May. Momentum has also improved significantly,” the analyst wrote.

Organigram, which graduated to the TSX’s senior exchange on August 22, has seen its share price sink along with the rest of the cannabis space in recent months. The stock rose 133 per cent between January 1 and May 21 of this year, getting to a high of $11.30 per share. The stock has lost 45 per cent since then, closing on Monday at $6.17 per share.

With his update, Stanley has reiterated his “Buy” rating and $15.00 target price for OGI, which represented a projected 12-month return of 125 per cent at the time of publication.