The worst is over for Organigram, says Raymond James

Operational excellence was the takeaway from Organigram Holdings (Organigram Holdings Stock Quote, Chart, News TSX:OGI) in its latest quarter, according to Raymond James analyst Rahul Sarugaser, who in an update to clients on Wednesday raised his rating for OGI from “Market Perform 3” to “Outperform.”

Moncton, New Brunswick, cannabis LP Organigram released its first quarter fiscal 2020 financials on Tuesday, showing a doubling in net revenue from $12.4 million a year ago to $25.2 million.

In his press release comments on the Q1, CEO Greg Engel said that despite the ongoing industry challenges, OGI welcomed its return to positive EBITDA with the quarter and the company’s first shipment of its Rec 2.0 products as planned and on schedule.

“We also look forward to the launch of the remainder of our vape pen portfolio followed soon after by our premium cannabis-infused chocolate products,” said Engel. “In addition to an exciting line-up of 2.0 products, we are rolling out a couple of new core strains, such as our high THC Edison Limelight, across the country following their success as limited-time-offers in smaller markets.”

OGI’s $25.2-million top line beat Sarugaser’s $19.5-million estimate as well as the consensus $19.5 million, while its adjusted EBITDA of $4.9 million (compared to last Q1’s $6.8 million) was also a strong beat of Sarugaser’s negative $1.1 million and the Street’s negative $1.4 million.

In his report, the analyst noted that OGI had returned to its industry-leading cultivation costs with cash costs of $0.61 per gram and “all-in” costs of $0.87 per gram, an improvement over last quarter’s all-in costs of $0.94 per gram.

“As we noted in our 4Q19 earnings note, we described our prediction that ‘The Worst is Over’ for OGI. With these 1Q20 results, we reaffirm this prediction,” wrote Sarugaser.

“Given the headwinds we see facing the cannabis market — in particular, limited retail outlets and crashing wholesale cannabis prices—we anticipated a difficult 1H20 for OGI, motivating us to reduce our revenue estimates and our rating to Market Perform (maintained target price at $9.00). We are pleasantly surprised to see OGI beat our estimates, as well as the street’s; OGI has successfully sidestepped industry roadblocks that some of its peers have met, violently, head-on.”

The analyst noted that Organigram has the enviable position of being one of the few producers that can still drive a positive margin while selling into the commoditizing wholesale market, being the second-lowest-cost indoor/greenhouse grower next to Village Farms. Sarugaser says that the company’s robust volumes and premium pricing of its wholesale cannabis as “providing solid ballast for the company as it weathers the tempestuous Canadian cannabis market.”

Sarugaser thinks that the worst is over, stock-wise, for OGI, indicating that the ramp in Cannabis 2.0 sales, further new product introductions and the prospect of multifold increases in retail store counts across several provinces as boding well for the stock.

The analyst’s new “Outperform” rating comes with a maintained $9.00 target price, which at press time translated to a projected 12-month return of 220 per cent.