Even the strongest operators in the sector aren’t immune to headwinds and that includes Organigram (Organigram Stock Quote, Chart, News TSX:OGI).
That’s the message from Raymond James analyst Rahul Sarugaser who on Thursday downgraded the pot stock, though the analyst has kept his bullish target price.
In a research update to clients, Sarugaser lowered his rating on OGI from “Outperform 2” to “Market Perform 3”. The analyst maintained his $9.00 target on the stock.
Sarugaser says these are troubled times for the sector, to say the least, and he expects it will remain that way for most of 2020.
“We expect the cannabis sector will continue to see headwinds during the first three quarters of 2020 driven primarily by crashing wholesale prices, a sluggish Ontario retail roll-out, and Cannabis 2.0 products introducing slowly to the market (instead of the tidal wave investors might have hoped for),” he said. “We expect these dynamics, among others, will yield weak 4Q19 earnings and a bottoming of the market during 1Q20, followed by a steady improvement in sales and slow recovery beginning in 2Q-3Q20 (among LPs that aren’t in a death spiral). Not until 4Q20—when the attrition of poorer operators has mostly run its course and a clear divergence emerges between well-run, strategically adept operators—do we expect a material boost in revenues on account of Cannabis 2.0 products, coupled with positive stock performance across the sector’s remaining operators.”
The analyst thinks OGI is one of the stalwarts in the space, but says its advantages will be tested this year.
While OGI is by no means immune to the headwinds facing the Canadian cannabis market during 1Q-3Q20, we do consider it one of the industry’s strongest, most strategic operators—one that will stand up to current market pressures and thrive when the sector recovers, which we expect to occur during 4Q20. We expect these dynamics to weigh on OGI’s 1H20 revenues (est. $19.5 mln for 1Q20), but we see OGI emerging strong by the end of the year (est. $36.5 mln for 4Q20). Therefore, we are revising our rating to Market Perform (was Outperform).
Sarugaser’s revised estimates for Organigram have the compant posting EBITDA of $17-million on revenue of $111-million in fiscal 2020. He expects those numbers will improve to EBITDA of $41-million on a topline of $183-million the following year.
“We think there is a lot to look forward to with OGI’s Cannabis 2.0 debut and rolling product launches through the first half of 2020,” the analyst concluded. “Once the company recovers from the hold-ups and false-starts Canada’s cannabis market proceeded through during 2019—and once some of the space’s weaker operators fold in the face of these challenges—we expect OGI to emerge stronger than ever, and in a considerably healthier marketplace.”
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