Organigram has price target cut at Mackie Research

On the back of disappointing guidance from Canadian cannabis company Organigram Holdings (TSX:OGI), Mackie Research analyst Greg McLeish has lowered his price target for the stock from $8.50 to $7.50, saying in a client update on Tuesday that despite the setback OGI is poised to be one of the leading licensed producers in the country.

Shares of Moncton, New Brunswick-based Organigram dropped sharply in trading on Tuesday as the markets reacted to news from management that the upcoming fourth quarter net revenue would come in below consensus estimates. Net revenue for the Q4 is now expected to be about $16.3 million, according to OGI, which would be down from $24.8 million in the third quarter. In the corporate update delivered on Monday, management said that the lower revenue along with about $1.6 million in packaging and inventory adjustments would likely result in an EBITDA loss for the fourth quarter (which ended August 31, 2019, and is to be presented on November 25, 2019).

“While Q4 2019 did not meet our overall expectations, we have not only emerged as one of the national leaders in the industry with significant growth expected in net revenue and strong market share, we expect to report positive adjusted EBITDA for the year,” said Greg Engel, CEO, in the press release. “We remain relentlessly focused on running a profitable business which earns attractive returns on investment for our shareholders over the near and long term. We are encouraged by Ontario’s recent announcement to expand the retail network and believe this should be an important catalyst to drive further growth for us and the industry as a whole.”

McLeish maintains that OGI remains well-positioned to capitalize on Cannabis 2.0, with the company currently on track to launch vape pens in mid-December followed by cannabis-infused chocolate products in calendar Q1 of 2020. The company also expects its shelf stable, water-compatible, flavourless nano-emulsion powdered beverage product ready for Q2 of 2020, while the company has submitted new product notifications to Health Canada for a vape pen portfolio and cannabis-infused chocolates last month.

McLeish says that the slow roll-out across Canada and especially in Ontario is playing a role in OGI’s development.

“Management highlighted that the lack of a sufficient retail network and slower than expected store openings in Ontario continued to impact sales in Q4/19 and this was further exacerbated by increased industry supply. Additionally, Q4/19 results were negatively impacted by product returns and price adjustments (of about $3.7 million) which was largely attributable to returns and price adjustments for two slower selling SKUs sold to the Ontario Cannabis Store (OCS),” McLeish writes.

The analyst also noted OGI’s strong balance sheet which should report about $47.9 million in cash and short-term investments as of the close of fiscal Q4 to go along with about $49.6 million in current and long-term debt.

McLeish has revised his estimates, now calling for fiscal 2019 revenue and EBITDA of $80.4 million and $24.1 million, respectively, and fiscal 2020 revenue and EBITDA of $140.2 million and $49.5 million, respectively.

His new $7.50 target represented a projected 12-month return of 68 per cent at the time of publication.