Organigram Holdings is ready for Cannabis 2.0, Mackie Research says

Organigram Holdings (Organigram Holdings Stock Quote, Chart, News TSX:OGI) has had its price target trimmed from Mackie Research analyst Greg McLeish on the back of a challenging cannabis environment in Canada.

McLeish reviewed OGI’s latest quarterly results in an update to clients on Wednesday, calling the stock still a “Buy” but with a new $7.00 per share price target (previously $7.50 per share).

Moncton, New Brunswick’s Organigram reported its fourth quarter and full year 2019 financials on Monday, showing net revenue for the quarter of $16.3 million, down from $24.8 million in the previous quarter, and an EBITDA loss of $7.9 million.

CEO Greg Engel remained upbeat in his comments, saying that OGI’s fiscal 2019 produced positive adjusted EBITDA overall. At the same time, he pointed to a lack of retail and slower than expected store openings in Ontario, especially, as continued headwinds.

“In 2019, we increased staffing and capacity to meet forecasted demand and maintain inventory in the market. Industry structural issues have challenged supply and demand dynamics in the short-term but we believe the growth opportunity in the Canadian cannabis market remains intact,” said Engel in a press release.

By comparison, McLeish had estimated $16.2 million in net revenue and an EBITDA loss of $3.7 million. (OGI’s $16.3-million revenue for the quarter was brought forward two weeks ago in a corporate update from management.)

Organigram had a Q4 net loss of $22.5 million or $0.14 per share, whereas McLeish was calling for a loss of $6.4 million. He chalked up the difference to the lower forecasted EBITDA and a negative $11.8-million change to fair value of biological assets and inventories. At the end of the quarter, OGI had cash and short-term investments of $44.9 million.

“Industry structural issues have challenged supply and demand dynamics in the short-term in the Canadian cannabis market but still, the growth opportunity remains intact,” wrote McLeish.

“Despite the slow rollout of adult-use recreational cannabis in Canada, Organigram estimated it has approximately 10 per cent of national market share. Canada’s cannabis market will continue to grow with the upcoming addition of cannabis derivative products as well as a large expansion in Ontario and Quebec retail stores. Organigram expects Q1/F20 net revenue to be higher than Q4 on increased sales to provinces and higher wholesale revenue,” he writes.

McLeish noted that OGI has decided to pause expansion of its Phase 4C construction, the final phase of construction at its Moncton campus expansion, which was related to cultivation. The company has said that it will delay this stage until there is more clarity on the provincial retail network across the country.

The analyst also pointed out that OGI is positioned for Cannabis 2.0.

“Organigram is on track to launch vape pens in mid-December followed by cannabis infused chocolate products in calendar Q1 2020. The company also expects its flavorless nano-emulsion powdered beverage product in calendar Q2 2020 based on expected licensing for the production area and equipment delivery and commissioning schedules,” McLeish wrote.

The analyst has revised his forecasts and now thinks that OGI will generate $20.0 million in EBITDA for fiscal 2019 on revenue of $80.4 million and $39.7 million in EBITDA for fiscal 2020 on revenue of $140.2 million. His new $7.00 target represents a projected 12-month return of 95 per cent at the time of publication.