Organigram will do well in the edibles market, Raymond James says

Raymond James analyst Rahul Sarugaser has remained bullish on Canadian cannabis play Organigram Holdings (Organigram Holdings Stock Quote, Chart, News TSX:OGI), saying in an update to clients on Monday that OGI will likely start taking a bigger piece of Canada’s high-margin Cannabis 2.0 pie, in the form of edibles.

Moncton, New Brunswick’s Organigram, which uses an indoor cultivation process for both its medical and adult-use cannabis production and has one of the lowest cultivation costs in the country, announced on Monday a corporate update vis a vis the COVID-19 pandemic as well as the receipt from Health Canada of all remaining licenses for its cannabis processing facility (Phase 5), along with the three-year renewal of its standard cultivation license. All licenses will be in force until March 20, 2023.

OGI’s Phase 5 expansion is a two-floor facility for the company’s complete cannabis processing activities including extraction, packaging, pre-roll, vape pen filling and powdered beverage production and packaging.

In his update, Sarugaser noted that OGI launched its first edible product, premium cannabis-infused truffles called ‘Bytes’, in markets across Canada in late February 2020 along with its ready-to-use Edison Brand vape pens.

“We have toured OGI's Phase 5 facilities and can confirm that these newly licensed areas should significantly expand OGI's processing capabilities, particularly with respect to Cannabis 2.0 products,” Sarugaser wrote.

“We believe these licenses should empower OGI in its effort to seize an even greater share of the high-margin Cannabis 2.0 marketplace. Each of these rooms are designed to EU GMP standard (certification in progress) and are intended to be quite flexible in purpose, furnishing OGI with agility in its in-house production capabilities and the ability to adapt to fast-evolving market demand,” he wrote.

Organigram management said it would be scaling back its workforce for social distancing’s sake during the COVID-19 pandemic and as a result will be reducing its cultivation run-rate.

“We continue to monitor this rapidly changing situation and will make the decisions necessary to ensure the safest environment for our employees and their families as well as protecting the best interests of our business and our stakeholders,” said Greg Engel, CEO, in the press release.

Sarugaser said an industry-wide decrease in cannabis cultivation and manufacturing as a result of COVID-19 “may push cannabis wholesale pricing higher in the medium term, perhaps making this channel lucrative once again for companies seeking to sell excess capacity to other producers.”

“We note that OGI, unlike many of its Canadian cannabis peers, did not need to trim its workforce during the past few months in the face of difficult market conditions. We see this as an indicator of the OGI's operational prowess and its acuity for agile scaling of operations,” Sarugaser wrote.

With the update, the analyst reiterated his “Outperform 2” rating and reaffirmed his forecasts, calling for fiscal 2020 (ending August) revenue and EBITDA of $111 million and $23 million, respectively, and for fiscal 2021 revenue and EBITDA of $183 million and $41 million, respectively.

Currently, OGI is down 32 per cent for 2020.