The worst is over for Organigram, Raymond James says

It’s been a rough ride for shareholders of Organigram (Organigram Stock Quote, Chart, News TSX:OGI), but this week’s Q4 results signal a bottom.

So says Raymond James analyst Rahul Sarugaser, who this morning reiterated his “Outperform” rating on the cannabis player.

On Monday, Organigram reported its Q4 and fiscal 2019 results. In the fourth quarter, the company lost $22.5-million on revenue of $16.3-million, a topline that was down from Q3’s $24.8-million.

“Our 2019 results reflected a successful year for Organigram,” CEO Greg Engel said. “Not only did we report strong top-line growth and establish an enviable national market share position in Canada, we generated positive adjusted EBITDA — one of the key measures we use to evaluate our performance. 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. As we were one of the first success stories to supply the market in the early days of legalization, we have had visibility for some time now on ultimate sell through to consumers and have adapted our production mix and product strategy to align with our understanding of emerging consumer preferences. We have great conviction in our strategy and ability to on board the new retail store openings and to launch a portfolio of edible and derivative products appealing to adult consumers. With our state-of-the-art indoor facility and leading cultivation practices, strong brand equity, in-house expertise and strategic partnerships, and a focus on cost management, we are well positioned for the long term.”

Sarugaser explained what Organigram has been going through of late.

“OGI is a victim of its own success,” he said. “When most of its peers were struggling to ramp production post-prohibition (Oct-2018), OGI continued to have enough supply on hand to fill provincial buyers’ inventories. Most of these sales were recognized in its 1Q19 through 3Q19 results. With competitors’ supply coming online, combined with anemic adult-use cannabis sales and retail store roll-out in Ontario and Quebec (resulting in slow-selling product, pricing adjustments, and returned materials), OGI saw a marked decline in sales during 4Q19. Further compounding this issue was OGI’s inventory write-down, resulting in negative EBITDA.”

The analyst said OGI has actually performed well against considerable headwinds.

“Much of the negative sentiment in the cannabis market can be blamed on major sales bottlenecks caused by slow roll-outs in Ontario and Quebec retail: factors that are beyond OGI’s—or any LP’s—control,” he wrote. “OGI has managed to maintain ~10% market share through the first year of post-prohibition sales: an enviable position and a notable feat in the face of fierce competition and tough market conditions. We continue to recognize OGI as an industry-leading operator with a solid management team. Below, we focus our attention on factors the company cancontrol and how we see these factors contributing to its long-term success, but first we acknowledge the challenging wholesale market conditions that will set the backdrop for the Canadian cannabis market over the next couple of years.”

In a research update to clients today, Sarugaser maintained his “Outperform” rating on Organigram.

The analyst thinks OGI will post EBITDA of $25-million on revenue of $80-million in fiscal 2019. He expects those numbers will improve to EBITDA of $70-million on a topline of $168-million the following year.

“During the next 18-24 months, we believe OGI is very well positioned to survive the industry’s forthcoming turbulence and emerge as a sector leader, drawing on its commitment to operational excellence and engineering principles. We note that OGI is trading near two-year lows and that, barring any unforeseen industry-wide calamities, we believe the worst of OGI’s woes are in the rearview. We see the light for 2020 and expect OGI to return to driving sustainable gross margin with its launch into Cannabis 2.0 products (vapes, chocolates, beverage powders) and its recalibration of dried bud, pre-roll, and cannabis oil (including its highly sought-after CBD oil) product sales across Canada,” Sarugaser concluded.