Organigram will have a great 2020, Paradigm says

2019 has been a write off for most pot stocks. But for Organigram, at least, 2020 is shaping up to be better says one analyst.

New Brunswick-based cannabis company Organigram Holdings (Organigram Holdings Stock Quote, Chart, News TSX:OGI) is pulling away from the pack of Canadian pot producers, according to Paradigm Capital analyst Corey Hammill, who in a research note to clients on Thursday reiterated his “Buy” rating while amending his target price range to between $7.00 and $10.00 ($8.50 midpoint).

Ahead of Organigram’s next quarterly report (its fourth quarter and full-year is due in mid-December), Hammill is expecting Q4 sales to be flat, similar to those in Q3, with the blame mostly falling on the slow rollout of legal weed stores across the country.

The analyst says that a lack of brick-and-mortar retail in Canada’s largest consumption markets continues to be the main headwind for licensed producers looking to get their product on the shelves. He notes that while both Ontario and Quebec — collectively one half of Canada’s cannabis revenue — are in the process of expanding their store count by three times and two times, respectively, both provinces will still be underserved on a relative basis compared to other provinces.

Yet the outlook for 2020 is better, especially for Organigram, which Hammill says has a number of catalysts upcoming. The catalysts include increased cultivation capacity in the first quarter 2020, the full-year impact of nationwide distribution, reaching an agreement with a beverage partner, increased brick-and-mortar retail and derivative product legalization.

As well, Hammill mentions OGI’s status as a low-cost producer in comparison with other Canadian LPs as a distinguishing feature of the company, pointing out that OGI has made a commitment to continue its cost leadership for future years, and that Organigram is just one of two LPs to have made an investment in cannabis biosynthesis development through its agreement with Hyasynth.

“Organigram’s innovative cultivation methodologies, industry-leading cost of goods, and its large market of end users (as one of only three LPs that have secured agreements with all ten provinces) have given rise to healthy gross margins,” writes Hammill.

“The company stands out from Canadian LP peers as one of the few to report four consecutive EBITDA positive quarters and to have more than 1.5 years of cash on its balance sheet. The industry has changed, and while others focus on survival, Organigram is prepared to take the next step and carry its traditional market leadership into Cannabis 2.0,” he writes.

OGI shares are down 19 per cent over the past month, which Hammill notes is markedly better than the 29-per-cent drop experienced by the Canadian Cannabis LP Tier 1 Index.

“For investors looking for exposure to a Canadian LP, on the eve of expanded retail access and the rollout of edibles, we recommend buying Organigram,” says Hammill.

The analyst has lowered his projections for OGI, calling for fiscal 2019 revenue and adjusted EBITDA of $89.2 million and $35.2 million, respectively (was $94.8 million and $39.5 million) and for fiscal 2020 revenue and adjusted EBITDA of $179.0 million and $59.2 million, respectively (was $186.3 million and $59.2 million). His $8.50 target midpoint would represent a projected 12-month return of 88.5 per cent at the time of publication.