Raymond James launches coverage of Organigram with an “Outperform” rating

Moncton, New Brunswick’s Organigram Holdings (Organigram Holdings Stock Quote, Chart, News TSX:OGI) is the manufacturing ‘Beast from the East,’ according to Raymond James analyst Rahul Sarugaser, who on Wednesday launched coverage of Organigram on with an “Outperform” rating and
$11.00 target.

Sarugaser begins his coverage initiation by giving a breakdown of Canada’s emerging cannabis sector, now almost a year into rec legalization. The analyst says that while there has been much public excitement over the space, the outcome so far leaves much to be desired from an investment point of view.

“The reality of Canada’s opening year of adult-use cannabis legalization has been characterized by slow-moving, tentative and misaligned attitudes among provincial and national governments, underprepared licensed producers of cannabis (giving rise to nationwide supply shortages) and wide variation in the quality of cannabis companies’ products, management and corporate governance, all of which have manifested in investor uncertainty and volatile markets through much of 2019, in our view,” writes Sarugaser.

Raymond James analyst Rahul Sarugaser says Organigram’s  pursuit of operational excellence is yielding results in the form of  industry-leading production costs…

The analyst contends that caution is the investor’s best friend when it comes to cannabis, and as such, he comes from an intentionally conservative, fundamentals-driven approach, where he leans heavily on data from US states with up-and-running rec economies (Colorado, Oregon, Washington, California and Nevada) to construct his analysis.

From that perspective, Organigram comes out a winner. Sarugaser puts the Canadian pot market at $2 billion in 2020 and $6 billion by the end of 2024, and, estimating OGI’s share of the market moving from its current 14 per cent to eight per cent by 2024, net revenues comes out as $219 million, $391 million and $552 million for 2020, 2021 and 2024.

“OGI draws on its deep bench strength in pharmaceutical and food manufacturing to produce consistent, high-quality products for Canada’s cannabis markets,” writes Sarugaser. “The company’s pursuit of operational excellence is yielding results: industry-leading production costs — averaging $0.90/g of dried flower over the last five quarters —which endow OGI with some of the Canadian cannabis industry’s highest gross margins. OGI’s manufacturing prowess will truly have its chance to shine during Canada’s Cannabis 2.0—derivative products such as edibles, beverages, vaporizers—era, starting October 2019. Priming itself for launch into this high-margin market, OGI has made a series of deft strategic maneuvers, including a partnership with leading vaporizer company PAX Labs and a $15 million investment in a state-of-the-art chocolate production line.”

Sarugaser says a key reason he appreciates OGI is its active adoption of next-generation technologies, epitomized by its investments in cannabinoid biosynthesis — a technology the analyst calls ‘massively disruptive’ — through a $10-million investment in Hyasynth Biologicals.

“With investments like these, OGI makes itself attractive to the large CPG, food and beverage, and pharmaceutical companies — premier cannabis companies’ ultimate buyers — we see waiting in the wings,” he writes.

Sarugaser has OGI generating revenue and EBITDA in fiscal 2019 of $97 million and $36 million, respectively, and fiscal 2020 revenue and EBITDA of $219 million and $87 million, respectively. His $11.00 target represents a projected 12-month return of 78 per cent at the time of publication.